INVESTOR'S REPLY MEMORIAL PUBLIC

IN THE MATTER OF AN ARBITRATION UNDER CHAPTER 11

OF THE NORTH AMERICAN FREE TRADE AGREEMENT

AND THE UNCITRAL ARBITRATION RULES

BETWEEN:

MERRILL & RING FORESTRY L.P.

Investor

AND

GOVERNMENT OF CANADA

Respondent

INVESTOR’S REPLY MEMORIAL

December 15, 2008

Appleton & AssociatesInternational Lawyers

77 Bloor Street West, Suite 1800

Toronto, Ontario M5S 1M2

Tel: (416) 966-8800

Fax: (416) 966-8801

Counsel for the Investor

Barry Appleton

Adam Kay

PUBLIC

Merrill & Ring Forestry L.P.

TABLE OF CONTENTS

I. OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

II. JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

1. Jurisdiction Ratione Personae: Merrill & Ring is an “Investor”. . . . 19

2. Jurisdiction Ratione Materiae: Merrill & Ring has an “Investment”

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

a. Canada Concedes that Merrill & Ring’s BC Lands, Timber and

Logs are “Investments”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

b. Merrill & Ring’s Interest in Realizing Fair Value for Its Logs on

the International Market is Covered by NAFTA Article 1139(h)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

3. Jurisdiction Ratione Temporis: Merrill & Ring’s Claim is Timely. . . 28

a. There are Several Related “Measures” at Issue in this Dispute

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

b. There are Both Continuing and Non-Continuing Measures at Issue

in this Dispute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

i. There are Several Continuing Measures in Dispute.. . . . . 35

ii. There are Several Non-Continuing Measures in Dispute

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

iii. Continuing and Non-Continuing Measures May be Based

on the Same Factual Background.. . . . . . . . . . . . . . . . . . . 42

c. Merrill & Ring’s Claim is Not Time-Barred by NAFTA Article

1116(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

d. Merrill & Ring’s Claim Represents a Balanced Approach to the

Limitation Period Envisaged by Article 1116(2). . . . . . . . . . . . . . 48

III. ARTICLE 1102 - NATIONAL TREATMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

1. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

2. GATT/WTO Experience is Important in Interpreting Article 1102

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

3. NAFTA Article 1102 - The Analytical Steps. . . . . . . . . . . . . . . . . . . . . 58

a. Step 1: “Like Circumstances” Analysis.. . . . . . . . . . . . . . . . . . . . 63

i. “Like Circumstances” Requires a Comparison Between

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Investors in Competition with One Another. . . . . . . . . . . 63

ii. “Like Circumstances” Does Not Mean “Identical” or “Most

Like” Circumstances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

iii. “Like Circumstances” Analysis Should Not Factor In

Policy Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

b. Step 2: "Treatment No Less Favorable”. . . . . . . . . . . . . . . . . . . . 76

i. “Treatment No Less Favorable” Means Equality of

Competitive Opportunities.. . . . . . . . . . . . . . . . . . . . . . . . 77

ii. “Treatment No Less Favorable” Means “Best” Treatment

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

iii. “Less Favorable Treatment” Does not Require

Discriminatory Intent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

c. Step 3: “With Respect to the Establishment, Acquisition,

Expansion, Management, Conduct, Operation, and Sale or Other

Disposition of Investments”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

4. Merrill & Ring is in “Like Circumstances” to Domestic Investors.. . 83

a. Merrill & Ring Is in “Like Circumstances” with Log Producers in

the BC Interior and Alberta. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

b. Merrill & Ring Is in "Like Circumstances" with Log Producers on

the BC Coast. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

c. Policy Rationale Does Not Render Merrill & Ring "Unlike"

Domestic Investors in Alberta, the BC Interior, or the BC Coast

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

d. Inter-regional Log Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

5. Merrill & Ring is Treated “Less Favorably” Than Domestic Investors

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

a. Merrill & Ring is Forced to Observe the Requirements of Notice

102 Other Log Producers in BC and Alberta Are Not. . . . . . . . 94

b. Merrill & Ring is Forced to Sell its Logs Domestically Log

Producers in Alberta are Not.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

c. Merrill & Ring is Forced to Sell its Logs under "Blockmail” Log

Producers in Alberta are Not.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

d. Merrill & Ring is Forced to Cut, Sort, and Scale its Logs in a

Particular Way Log Producers in the BC Interior and Alberta

Are Not. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

e. Merrill & Ring is Forced to Observe the So-Called “Remoteness

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Rule” Other Log Producers on the South-Coast Are Not.. . . . . 98

f. Merrill & Ring is Forbidden from Obtaining Standing Exemptions

Log Producers on Provincial Lands Are Not. . . . . . . . . . . . . . 101

g. Merrill & Ring is Forbidden from Advertising Standing Timber

Log Producers in the BC Interior Are Not.. . . . . . . . . . . . . . . . . 103

h. Merrill & Ring is Required to Pay a Fee-in-Lieu to Export its

Provincial Logs Federal Log Producers are Not. . . . . . . . . . . 105

6. The “Less Favourable Treatment” Received by Merrill & Ring is

With Respect to the Management, Operation and Sale of its

Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

IV. NAFTA ARTICLE 1105 – FAIR AND EQUITABLE TREATMENT.. . . . . . . . . . 107

1. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

2. “Fair and Equitable Treatment” Is an Autonomous Standard.. . . . 109

3. It is Customary to Interpret Treaties in Accordance with All Sources

of International Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

4. The “Fair and Equitable Treatment” Standard May Be Inferred from

International Jurisprudence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

5. The Autonomous “Fair and Equitable Treatment” Standard and

the International Law Standard Have Converged. . . . . . . . . . . . . . . 120

6. The Content and Scope of “Fair and Equitable Treatment”.. . . . . . 122

a. Canada Need Not Act in Bad Faith to Breach its Duty to Act in

Good Faith. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

b. Breach of Any One of the Elements of “Fair and Equitable

Treatment” is Sufficient but not Necessary for a Violation of

NAFTA Article 1105(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

c. The Threshold for a Breach is Far Lower than Canada Contends

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

d. The Test is a Flexible one to be Applied in All the Circumstances

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

6. Canada has Breached its Obligation to Provide Merrill & Ring “Fair

and Equitable Treatment”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

a. The Log Export Control Regime is Secretive and Opaque. . . . . 132

b. The Federal Government is Not Legally Limited from Granting

Standing Exemptions It is a Political Choice. . . . . . . . . . . . . . 141

c. The Log Export Control Regime Discriminates Against Log

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Producers in Favour of Log Processors. . . . . . . . . . . . . . . . . . . 144

d. The Log Export Control Regime Discriminates Against Federal

and Coastal Log Producers in Favour of Provincial and Interior

Log Producers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

e. The Log Export Control Regime Discriminates Against Provincial

Log Producers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

f. The Log Export Control Regime Fosters the Illicit Practice of

“Blockmailing”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

g. The Log Export Control Regime Creates an Unstable Business

Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

V. NAFTA ARTICLE 1106: PERFORMANCE REQUIREMENTS. . . . . . . . . . . . . . 156

1. The Ordinary Meaning of NAFTA Article 1106(1) Supports Merrill &

Ring’s Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

a. Canada Compels Merrill & Ring to Export a Given Level of Goods

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

b. Canada Compels Merrill & Ring to Accord a Preference to Goods

Produced in Its Territory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

c. Canada Compels Merrill & Ring to Accord a Preference to

Services Provided in Its Territory. . . . . . . . . . . . . . . . . . . . . . . . 161

d. Canada Compels Merrill & Ring to Restrict Sales in Its Territory

by Relating Them to the Volume of Its Exports. . . . . . . . . . . . . . 163

e. Canada’s Measures Are in Connection with the Management of

Merrill & Ring’s Investment in Canada. . . . . . . . . . . . . . . . . . . 164

2. The Context of NAFTA Article 1106(1) Supports Merrill & Ring’s

Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

3. The Object and Purpose of the NAFTA Supports Merrill & Ring’s

Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

4. Interpreting NAFTA Article 1106(1) In Accordance with its Plain and

Ordinary Meaning as well as Its Object and Purpose Does Not Lead

to an Absurd Result. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

VI. NAFTA ARTICLE 1110: EXPROPRIATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

1. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

2. The Law of Expropriation: The Analytical Steps.. . . . . . . . . . . . . . . 169

3. Merrill & Ring’s Investment Includes an Interest in Realizing Fair

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Market Value for its logs on the International Market. . . . . . . . . . . 172

4. Canada Has Completely Expropriated Merrill & Ring’s Investment

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

5. Canada Has Not Paid Merrill & Ring Any Compensation. . . . . . . . 174

VII. DAMAGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

1. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

2. Merrill & Ring Harvest Volumes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

3. Damages Suffered by Merrill & Ring. . . . . . . . . . . . . . . . . . . . . . . . . 180

a. Losses by Category. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

b. Losses By NAFTA Provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

VIII. RELIEF REQUESTED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186

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I. OVERVIEW

1. Canada has established a complex regulatory regime to control the export of logs from

British Columbia (“Log Export Control Regime”). The Log Export Control Regime is

unique to BC: in no other Canadian province are there any controls on the export of logs.

The purpose of the Regime is to ensure that British Columbia (“BC”) log processors have

ample access to logs at artificially suppressed prices. Canada has placed the very log

processors who benefit from the enforcement of this unfair regime as the administrators of

this regime. The regime forces companies like Merrill & Ring to sell their BC logs to BC

sawmills at prices far lower than Merrill & Ring could obtain in the international market.

2. This is a case about basic unfairness. It is about how foreign investors are forced by the

state to prop up a domestic industry. It is about an administrative process that creates a

culture in which unseemly conduct is encouraged to fester. The evidence will show that

log industry-style blackmail, secret decisions, avoiding written communication - all are

part of the daily business environment in which Merrill & Ring is forced to operate.

Jurisdiction

3. Canada has raised a defense that parts of this claim are not admissible. Canada has

mischaracterized the Investor’s claim as being solely about Notice 102. It then relies on

this fundamental mischaracterization to argue that this Tribunal does not have the

authority to rule on this claim, because of time limitations discussed in NAFTA Article

1116(2). Of course, the Investor’s own materials make it abundantly clear that this

arbitration is about much more than one federal regulation.

4. NAFTA Article 1116(2) discusses how this Tribunal has authority over claims that have

been submitted to it within three years of when an Investor first knew or ought to have

known of a breach of the NAFTA and of loss arising therefrom. Canada exerts much effort

in discerning the meaning of “first” in NAFTA Article 1116(2). In its focus on “first”, it

fails to appreciate that the event that triggers the calculation of the time limit is a

“measure”. A measure is broadly defined in the NAFTA and its plain meaning in light of

the context, object and purposes of the NAFTA supports the proposition that there are

several measures at issue in this dispute. It is only once a “measure” is established that the

calculation required by NAFTA Article 1116(2) can be undertaken. Having established the

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NAFTA Article 1131 makes the NAFTA and applicable rules of international law the governing body for this1

arbitration.

measure, the Tribunal is then required to establish the first point in time in which

knowledge of the breach by the measure and the knowledge of loss occasioned by the

measure intersect. It is from this point that the three years should be calculated.

5. The measures at issue in this dispute all occur within three years before the filing of the

Notice of Arbitration. Some of these impugned measures are continuing, that is, their

breach pre-dated and continued into the three year time period. However the loss

occasioned by these measures first became known during the three year period. Thus the

Tribunal has jurisdiction over all these measures. Other impugned measures that first arose

after December 26, 2003 are non-continuing, that is, both their breach and the loss

occasioned by them occurred instantaneously within the three-year time period. The

Tribunal also has jurisdiction over these measures.

6. Much of Canada’s legal argument with respect to the meaning of NAFTA Article 1116(2)

has been made through a legal opinion produced by Professor Michael Reisman. Since

Professor Reisman’s legal opinion is about the interpretation of the NAFTA, which is the

governing law of this arbitration, the Investor has objected to the appropriateness of1

addressing these legal issues by way of expert evidence. The Investor has submitted a

responsive expert opinion on these same issues produced by Professor Robert Howse from

New York University. Professor Howse’s legal opinion is proffered with a proviso: that

should the Tribunal rule that Professor Reisman’s legal opinion is more appropriately legal

argument than the subject of an expert report, then the Investor will also submit Professor

Howse’s argument as part of its legal argument rather than as an expert legal opinion.

National Treatment

7. In its Counter-Memorial, Canada has advanced a highly artificial construction of national

treatment. Canada’s construction is obviously designed to assist its defense of this case,

but Canada’s theory is inconsistent with the fundamental principles which underscore the

meaning of national treatment. Furthermore, Canada’s approach is inconsistent with the

context, meaning and objectives of the treaty. By comparison, the Investor sets out a

detailed definition of the national treatment obligation that is based on careful examination

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of the negotiating history of the NAFTA, the NAFTA’s text, principles, rules and

objectives, and upon the decisions of other international tribunals.

8. The evidence produced by the Investor demonstrates that Merrill & Ring is in “like

circumstances” with log producers who export logs from other parts of Canada and from

other parts of the province of British Columbia. In addition, Merrill & Ring is also in “like

circumstances” with other log producers who export logs, including those located on the

coast of British Columbia. As a result, this Tribunal must take into account situations

where more favourable treatment has been provided to log producers who are in “like

circumstances” with Merrill & Ring.

9. Log producers in other parts of Canada are not subjected to the onerous and confiscatory

requirements of the Log Export Control Regime as practiced in British Columbia. They

are obviously treated more favourably. Moreover, other log producers who operate in the

province of British Columbia are treated more favourably. This more favourable treatment

occurs with respect to mandatory regulations which are imposed on log producers like

Merrill & Ring.

10. Of particular note is the issue of the provision of standing export exemptions for log

producers, which are known as standing green exemptions. These standing green

exemptions, and their associated standing applications, give a tremendous advantage in

treatment to those only granted the ability to sell their trees once they know they are able

to obtain export approval. Standing exemptions are of enormous value to log producers

since they represent an automatic bypassing of the log control regime which enables the

guaranteed export of uncut logs. There are several reasons for this.

a) Since log producers with standing exemptions know ahead of time that they

will be able to export their logs, they can enter into predictable supply

contracts with their customers;

b) Log producers with standing exemptions that have them are immune from

the ever-present threats of “blockmail” and special targeting;

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c) The logs of log producers with standing exemptions will not deteriorate

from infestation and exposure to the elements as they wait for export

approval; and

d) Since standing exemptions represent a guarantee to log producers that they

will be able to export their logs, they know they will be able to receive the

best market price for their logs, not the artificially suppressed BC market

price.

e) Log exporters with standing exemptions can cut their logs to meet the

needs of their customers, and are not required to cut, sort and scale them to

the preferences of BC log processors.

11. This is a very straightforward matter. Canada forbids Merrill & Ring from obtaining

standing exemptions for its lands. At the same time, Canada grants standing exemptions

to Merrill & Ring’s competitors. As a result, there can be no doubt that by denying Merrill

& Ring even the possibility of obtaining standing exemptions, Canada accords Merrill &

Ring “less favorable treatment” for the purposes of Article 1102.

12. Much of the damage caused to companies like Merrill & Ring occurs from the lack of

predictability and customization to customer preferences that is lost by Canada’s

requirement with respect to how logs are produced in order to obtain an export permit.

These requirements are a disguised form of market subsidization to log processors located

in the province of British Columbia. These are all policy objectives which fly in the face of

the free trade objectives of the NAFTA.

13. In particular, Canada fails to meet its NAFTA obligations to provide national treatment to

Merrill & Ring because it fails to provide most favourable treatment under the Log Export

Control Regime with respect to:

a) The requirement to be subjected to the surplus testing prior to being granted

an exemption to export their timber;

b) Merrill & Ring’s ineligibility to obtain standing applications and/or obtain

standing exemptions;

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c) The requirement to cut and sort timber from their federally regulated

properties to artificial “normal market practices”;

d) The requirement to follow the additional rules for Merrill & Ring properties

located in the remote Coastal region;

e) The requirement to scale all timber metrically even when such scaling is

unnecessary; and

f) The requirement to remit the Fee-in-lieu on provincial rafts that are

exported.

International Law Standards of Treatment

14. Canada has advanced a meaning to the international law standard of treatment contained in

NAFTA Article 1105 that is narrow and simply not in keeping with the text of the treaty.

The meaning of the international standard is well known and has been well canvassed by

international tribunals, including other NAFTA tribunals. Canada argues for a threshold

standard of breach that is inconsistent with the principles of state responsibility set out by

the International Law Commission and by previous international investor-state tribunals. If

Canada’s approach were to be followed, there would be no effective protection for rule of

law and fundamental fairness issues within the NAFTA.

15. Canada fails to meet its obligations under the Log Export Control Regime as Merrill &

Ring is subjected to unfair and inequitable treatment including:

a) The requirement to be subjected to the Surplus Testing Procedure prior to

being granted an export permit for its logs;



c) The requirement to cut and sort timber from its federally regulated


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d) The requirement to follow the additional rules for Merrill & Ring properties

located in the remote Coastal region; and

e) The requirement to scale all timber rafts metrically even when such scaling

is unnecessary; and

f) The requirement to remit the fee-in-lieu on provincial rafts that are

exported.

16. The Log Export Control Regime is administered in a highly secretive and non-transparent

manner that flies in the face of the most fundamental aspects of the rule of law. The

Surplus Testing Procedure administered by TEAC/FTEAC is completely enshrouded in

secrecy from beginning to end. Yet some of the most essential elements of Merrill &

Ring’s fundamental business operations are completely controlled by this non-transparent

administration of the Log Export Control Regime.

17. Canada is entirely aware of highly improper practices known as “blockmailing” which are

taken by log processors to further extract concessions from log producers. Those log

producers who have standing exemptions or standing applications are exempt from the

application of these unethical practices which are enabled by Canada’s administration of

the Log Export Control Regime.

18. Furthermore, there are serious questions about the natural justice and due process which

occurs with respect to TEAC/FTEAC on account of its composition. No private log

producers are permitted to sit on this body whereas log processors are always represented

despite their obvious interest in maintaining artificially low log prices and onerous

conditions which benefit them at the cost of private log producers like Merrill & Ring.

19. The onerous requirements under the Log Export Control Regime with respect to the

mandatory cutting and storage of logs as they await export certification compounds the

fundamental unfairness of the regime. Requirements to cut, sort and scale logs to the

preferences of local mills prevent log producers from being able to enter into long term

supply contracts with foreign customers. This results in highly impaired market operations

and significant losses for domestic log producers who are federally regulated.

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20. The elements of unfairness inherent in the Log Export Control Regime are cumulative to

each other. While each is individually harmful, when taken together these elements are all

the more harmful to private landowners while benefiting of domestic British Columbia log

producers.

The Imposition of Performance Requirements

21. The NAFTA contains specific and carefully drafted rules to prohibit the imposition of

performance requirements upon foreign investors. Under NAFTA Article 1106, the

NAFTA Parties agreed not only to prohibit these industrial policy measures against

investors from each of the three NAFTA Parties, but they actually agreed to ban these

performance requirements completely, against investors from any country in the world.

The Log Control Export Regime fails to meet Canada’s obligations under NAFTA Article

1106 as they impose:

a) The requirement to cut and sort timber from their federally regulated

properties to “normal market practices”;

b) The requirement to scale all timber rafts metrically even when such scaling

is unnecessary; and

c) The requirement to follow the additional rules for Merrill & Ring properties

located in the remote Coastal region

The Duty to Compensate on Expropriation

22. Canada agrees with Merrill & Ring on the analytical steps necessary at international law to

establish an act of expropriation. Since in the context of expropriation the only investment

at issue is Merrill & Ring’s interest to realize fair market value for its logs on the

international market, the only requirement in examining the issue is simply to ask whether

Merrill & Ring has such an interest.

23. Canada applies an outdated conception of property rights by denying that this Tribunal has

jurisdiction over Merrill & Ring’s intangible investments. This concept is contrary to the

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plain meaning of the NAFTA, previous NAFTA decisions and common sense. It is clear

that the intangible rights at issue in this claim are part and parcel of the business of Merrill

& Ring. This Tribunal should therefore reject Canada’s arguments. It has authority to rule

on the tangible and intangible elements of Merrill & Ring’s investment.

24. Canada has taken acts tantamount to the expropriation of property interests owned by

Merrill & Ring. Canada has not provided Merrill & Ring with fair market value

compensation. The Log Export Control Regime substantially interferes with Merrill &

Ring’s ability to realize fair market value of its logs on the international market. Canada

takes away value from Merrill & Ring and redistributes it to other private interests in a

manner contrary to the obligations of due process and NAFTA Article 1105.

25. In particular, the Log Export Control Regime is inconsistent with Canada’s obligation to

provide fair market value compensation upon an act tantamount to expropriation due to:

a) The requirement to be subjected to the Surplus Testing Procedure prior to

being granted an exemption to export their timber;

b) The requirement to cut and sort timber from their federally regulated


c) The requirement to scale all timber rafts metrically even when such scaling

is unnecessary;

d) The ineligibility to submit standing applications and/or obtain standing

exemptions; and

e) The requirement to remit the Fee-in-lieu on provincial rafts that are

exported.

Damages

26. The Investor has set out an independent valuation report done by Mr. Robert Low of

Deloitte & Touche LLP. R-1(b)(i)

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Low Expert Report, December 14, 2008 at para. 1.38.2

27. The Low Report has calculated the losses related to Canada’s failure to meet its NAFTA

Article 1102 national treatment obligations as including:

a)

b)

c)

d)

28. The Low Report has calculated the losses related to Canada’s failure to meet its obligation

to provide international law standards of treatment under NAFTA Article 1105 as

including:

a)

b)

c)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Low Expert Report at para. 1.42. 3



d)

29. The Low Report has calculated losses related to Canada’s imposition of performance

requirements prohibited under NAFTA Article 1106 as including

The Low Report has considered the loss related to NAFTA Article

1106 to be 4

30. The Low Report has calculated the losses related to Canada’s failure to pay compensation

in accordance with the obligations set out in NAFTA Article 1110 include:

a) ;

b)

c) .5

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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31. The damages reported in the Low Report can be summarized as follows:

NAFTA Article Damages Amount (C$)

Article 1102 $16,804,068

Article 1105 $16,804,068

Article 1106 $16,756,272

Article 1110 $18,682,368

The Low Report points out that these 6

32. Merrill & Ring has incurred losses on past actual sales. Mr. Low identifies that these past

losses are:

a)

b)

c)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Low Expert Report at para. 2.16.7

d)

e)

f)

g)

33. Merrill & Ring incurs additional costs to comply with the Log Export Control Regime.

These costs include: 7

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Low Expert Report at paras. 1.38 1.39.8

34.

35. Mr. Low finds that the losses related to NAFTA Article 1102 include:

Based on these four categories, Deloitte calculates Merrill & Ring's losses due to the

breach of NAFTA Article 1102 as $16,804,068. 8

36. Mr. Low finds that the losses related to NAFTA Article 1105 include:

a)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Based on the above, the Low Report calculates Merrill & Ring's losses due to the breach of

NAFTA Article 1105 as $16,804,068. 9

37. Mr. Low finds that the losses related to NAFTA Article 1106 include the

". Based on this Deloitte calculates Merrill & Ring's losses due to the breach of

NAFTA Article 1106 as

38. Mr. Low calculates the losses related to NAFTA Article 1110 determined on the basis of

fair market value as at December 27, 2008 include:

Based on the above, Mr. Low calculates Merrill & Ring's losses due to the breach of

NAFTA Article 1110 as $18,682,368. 11

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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39. In furtherance of its arguments made in this Reply Memorial, the Investor relies on the

following statements, reports and legal opinions:

a. WITNESS STATEMENT: is the

, a lumber manufacturer located in

that has obtained logs used to manufacture lumber from the coast and interior of

British Columbia, Alberta and the United States identifies that logs from

the BC coast and interior, Alberta, and the United States all have the same end

uses;

b. BRANTER EXPERT STATEMENT: Keith Branter is a Registered Professional

Fortester and a member of the College of Alberta Professional Foresters based in

Alberta. Mr. Branter explains that similar species of trees are grown in Alberta, and

that private forest landowners in Alberta are not subject to any of the Log Export

Control Regime;

c. HOWSE LEGAL OPINION: Professor Robert Howse is the Lloyd C. Nelson

Professor of International Law at New York University. Professor Howse responds

to legal issues raised by Professor Michael Reisman. Professor Howse’s opinion is

made subject to specific observations made by the Investor in this Reply Memorial;

d. KURUCZ REPLY WITNESS STATEMENT: Tony Kurucz is President and

owner of Progressive Timber Sales Ltd. Mr. Kurucz responds to Canada’s

assertion that towing logs to non-remote areas is not an imposition and provides

the circumstances under which he was told by a member of TEAC/FTEAC that

Merrill & Ring’s logs from its Theodosia location are considered remote;

e. LOW EXPERT REPORT. Robert Low is a Chartered Business Valuator at

Deloitte and Touche, LLP. Mr Low provides a valuation report in response to

observations made by Canada on damages including those made by Mr. Bowie of

KPMG, Mr. Jendro of Jendro & Hart and Mr. Reishus;

f. MACPHERSON EXPERT STATEMENT: Stuart Macpherson is a forestry

consultant and the Executive Director for the Private Managed Land Council. Mr.

Macpherson responds to Canada’s claim that it is well-known that Merrill &

C-1(b)(ii) C-1(b)(ii) C-1(b)(ii)

C-1(b)(ii)

C-1(b)(ii)

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Ring’s Theodosia lands are remote. He also provides an observation on the

sustainability of the policies underpinning the Log Export Control Regime.

Additionally, Mr. Macpherson has undertaken a review of TEAC/FTEAC Minutes

and Provincial Orders-in-Council ("OICs") for blanket standing timber

exemptions to respond to certain issues raised by Canada;

g. MATKIN EXPERT LEGAL WITNESS STATEMENT: James Matkin QC is a

former Deputy Minister of Intergovernmental Affairs in the Government of British

Columbia and one of the drafters of the amendments to the Canadian constitution

in 1981. Mr. Matkin provides a legal opinion under Canadian law on Canada’s

claim that it has no constitutional authority to grant standing exemptions for

federal lands in British Columbia;

h. WITNESS STATEMENT:

provides his

understanding of remoteness and his experience of blockmailing. He also

highlights the extra costs as a result of the Log Export Control Regime and the

export premium;

i. RUFFLE EXPERT REPORT: Doug Ruffle is a Registered Professional Forester

based in British Columbia. Mr. Ruffle responds to issues raised by David Jendro

and considers other issues raised by Canada and David Reishus. In addition, Mr.

Ruffle has also done an independent review of the Merrill & Ring forest inventory

in Canada;

j. WITNESS STATEMENT: is the

own lands in

the Wet Belt area of the British Columbia interior. In his witness statement,

describes the extraordinary lengths which takes to

prevent its logs from being blockmailed under the Log Export Control Regime;

C-1(b)(ii) C-1(b)(ii)

C-1(b)(ii)

C-1(b)(ii)

C-1(b)(ii) C-1(b)(ii)

C-1(b)(ii) C-1(b)(ii)

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k. SCHAAF REPLY WITNESS STATEMENT: Norm Schaaf is the Vice-

President of Timberlands and Administration for Merrill & Ring Inc. Mr. Schaaf

addresses the extra cost of the Log export Control Regime and how it affects

Merrill & Ring’s harvest plans;

l. STUTESMAN REPLY WITNESS STATEMENT: Paul Stutesman is the Vice-

President and General Manager of Merrill & Ring Forest Products LP. Mr.

Stutesman responds to Canada’s assertion that TEAC/FTEAC meetings are

cancelled in only the most extraordinary circumstances, that the Minister of

Foreign Affairs regularly disregards TEAC/FTEAC recommendations, and that

TEAC/FTEAC properly assesses fair market value on Merrill & Ring’s logs. Mr.

Stutesman also explains the factors regarding decisions to export logs. Mr

Stutesman also explains that Merrill & Ring does not sort its export logs any

differently than it sorts its domestic logs and that Merrill & Ring’s Canadian logs

are virtually identical to its American logs.

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The Investor continues to rely on the jurisdictional arguments made in the Investor’s Memorial, February 13, 200812

at paras. 432 482.

NAFTA Article 1131 makes the NAFTA and applicable rules of international law the governing body for this13

arbitration.

Investor’s Memorial at paras. 432 433.14

II. JURISDICTION

40. There are three requirements for this Tribunal to assume jurisdiction over this dispute.

First, the Tribunal must be satisfied that Merrill & Ring qualifies as an “investor” under

NAFTA Article 1139. Second, the Tribunal must be satisfied that Merrill & Ring has an

“investment”, also under NAFTA Article 1139. And third, the Tribunal must be satisfied

that Merrill & Ring has initiated this claim on a timely basis under NAFTA Article

1116(2). Merrill & Ring has satisfied all three requirements for this Tribunal to assume12

jurisdiction over this dispute. As such, this Tribunal must assume jurisdiction and

consider the dispute on the merits.

41. Much of Canada’s legal argument with respect to the meaning of NAFTA Article 1116(2)

has been made through a legal opinion produced by Professor Michael Reisman. Since

Professor Reisman’s legal opinion is about the interpretation of the NAFTA, which is the

governing law of this arbitration, the Investor has objected to the appropriateness of13

addressing these legal issues by way of expert evidence. The Investor has submitted a

responsive expert opinion on these same issues produced by Professor Robert Howse from

New York University. Professor Howse’s legal opinion is proffered with a proviso: that

should the Tribunal rule that Professor Reisman’s legal opinion is more appropriately legal

argument than the subject of an expert report, then the Investor will also submit Professor

Howse’s argument as part of its legal argument rather than as an expert legal opinion.

1. Jurisdiction Ratione Personae: Merrill & Ring is an “Investor”

42. Merrill & Ring has demonstrated that it is as an “investor” as defined by NAFTA Article

1139. Canada has not contested this fact nor presented arguments to the contrary. As a14

result, there is no dispute that this Tribunal has jurisdiction ratione personae.

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Canada’s Counter Memorial at para. 263.16


2. Jurisdiction Ratione Materiae: Merrill & Ring has an “Investment”

43. This Tribunal has jurisdiction ratione materiae. That is, not only is Merrill & Ring clearly

an “investor”, but it also clearly has “investments” as defined by NAFTA Article 1139 of

the NAFTA.

a. Canada Concedes that Merrill & Ring’s BC Lands, Timber and

Logs are “Investments”

44. Merrill & Ring has various types of investments. The first two types of investments15

Merrill & Ring has involve “real estate” and “tangible property,” as recognized under

NAFTA Article 1139(g). First, Merrill & Ring has BC timberlands, which clearly

constitutes “real estate”. Second, Merrill & Ring has property located on, and flowing

from its BC timberlands. This includes its timber, as well as the logs that come from its

timber. These clearly qualify as “tangible property”.

45. Canada has conceded that Merrill & Ring’s BC timberlands qualify as investments. 16

Canada has also conceded that the timber located on Merrill & Ring’s BC timberlands,

and the logs that come from that timber, also constitute investments under NAFTA Article

1139(g). As a result, there is no question that this Tribunal has jurisdiction ratione17

materiae with respect to Merrill & Ring’s BC timberlands, timber and logs.

b. Merrill & Ring’s Interest in Realizing Fair Value for Its Logs on the

International Market is Covered by NAFTA Article 1139(h)

46. Merrill & Ring has another type of investment that is less “tangible” than its lands, timber

and logs. This relates to its interest in realizing fair value for its BC logs on the export

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Investor’s Memorial at para. 30.18



The Oxford English Dictionary, 2 ed., Vol. VII, at 1099, Investor’s Book of Authorities (Tab 128).21 nd

market. Canada denies that this qualifies as an investment under Paragraph (h) of the18

definition of investment in NAFTA Article 1139.19

47. NAFTA’s definition of investment is contained in NAFTA Article 1139. Paragraph (h) of

the definition includes the following within the definition of “investment”:

interests arising from the commitment of capital or other resources in the territory of a

Party to economic activity in such territory, such as under:

(i) contracts involving the presence of an investor’s property in the territory of the

Party, including turnkey or construction contracts, or concessions; or

(ii) contracts where remuneration depends substantially on the production, revenues or

profits of an enterprise.

48. Canada has argued that the definition of investment cannot be interpreted to mean that

Merrill & Ring has an investment in its ability to sell its products to its markets. In so

doing, it engages in all sorts of linguistic contortions that strain the limits of credibility.

For example, Canada tries to restrict the meaning of “interest” by ascribing to it a technical

and narrow legal definition from the Shorter Oxford English Dictionary. What Canada20

fails to mention, however, is that the same dictionary endorses many other broader

definitions of “interest”, including “[a] thing that is of some importance to a person,

company, state, etc.” This commonsense meaning is confirmed in the full length version

of the Oxford English Dictionary, in which the very first definition of “interest” offered is

as follows: “makes a difference, concerns, matters, is of importance.” Merrill & Ring’s21

interest in realizing fair value for its logs on the world market clearly “makes a

difference”, “concerns”, “matters”, and “is of importance” to it.

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49. Canada goes on to suggest that the interests referred to by Paragraph (h) of the definition

of investment is limited to interests such as contracts and concessions. There is simply22

no reasonable basis for this strained interpretation either. Paragraph (h) is clear and broad.

The interests listed therein are mere examples in what is otherwise an open-ended list.

Had the drafters intended to limit the types of interests covered by Paragraph (h) only to

contracts and concessions, they could have easily done so with express wording to that

effect. If one wanted to restrict the scope of “interests” referred to in Paragraph (h), it

would be reasonable to suggest that they may be limited to commercial interests, since

these clearly arise from the commitment of capital. To suggest, however, that they are

limited only to contracts and concessions is far too restrictive, is not at all supported by the

overall wording of Paragraph (h), and not consistent with the objects and purposes of the

Treaty.

50. Finally, Canada argues that the other types of investment listed in NAFTA Article 1139

demonstrate that the interests referred to must be concrete, capable of being bought, sold,

traded or borrowed against. The definition of investment in NAFTA Article 1139 does23

not cover only concrete investments. This is clear from the fact that Paragraph (g) lists

“intangible property” as a protected investment. In any event, it is for the very reason that

the other types of investment listed in Article 1139 speak of investments that are capable

of being bought and sold, and that the interests referred to in Paragraph (h) include other

types of investment.

51. Yet even if it were true that Paragraph (h) was only meant to cover investments that can

be bought and sold, Merrill & Ring’s interest in realizing fair value for its logs on the

export market still qualifies. Merrill & Ring’s interest in realizing fair value for its logs

on the export market is inextricably linked to the value, for example, of its goodwill. If

Merrill & Ring were not subject to the various requirements of the Log Export Control

Regime, it would be able to add value to its logs in several ways. For example, it would

be able to cut and sort its logs to the preferences of its export customers instead of to the

PUBLIC

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Stutesman Witness Statement, February 8, 2008 at para. 25.24


26

preferences of BC sawmills. Merrill & Ring would also be able to guarantee its24

customers security of supply, delivering its logs on time when and where its export

customers need them, and at reduced expense to their customers. This enhanced25 26

service, in turn, would translate into increased goodwill with its customers. This

goodwill would be reflected on Merrill & Ring’s books, and in the value of its brand. It

is obvious that companies invest in goodwill. It is equally obvious that Merrill & Ring’s

“interests” under Article 1139(h) include the concept of goodwill, and that this interest is

in fact capable of being bought and sold.

52. In any event, Article 1139 is clear as to what does not constitute an investment:

...investment does not mean:

(i) claims to money that arise solely from:

(i) commercial contracts for the sale of goods or services by a national or an

enterprise in the territory of a Party to an enterprise in the territory of

another Party;

(ii) the extension of credit in connection with a commercial transaction, such as

trade financing, other than a loan covered by subparagraph (d); or

(j) any other claims to money.

53. Unlike the list of what does constitute an investment, the list of what does not constitute

an investment under NAFTA Article 1139 is closed, limited to what is expressly

contained in the list. The drafters only intended that the bread and butter of trade in

goods such as claims to money be excluded from consideration nothing else. Merrill &

Ring’s interest in realizing fair market value for its logs on the international market is not

a claim to money. Rather, it is an interest arising from its commitment of capital to

economic activity in Canada. Since unlike claims to money this interest is not

expressly excluded by NAFTA Article 1139, it must be covered.

C-1(b)(ii)

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Canada’s Counter Memorial at para. 275, 278.27

Pope & Talbot v. Canada at para. 96, as quoted by Canada in its Counter Memorial at para. 273, Respondent’s28

Book of Authorities (Tab 110).

54. The centrepiece to Canada’s defence is its claim that any “investment” covered by Article

1139 must qualify as a “stand alone” investment. Nowhere does NAFTA’s definition of27

investment contained in Article 1139 support Canada’s claim. Merrill & Ring has not

advanced any such argument. Canada has apparently invented this “requirement” and

attempted to make it appear as if it is in fact somehow a requirement of Article 1139 that

investments “stand alone”. In the process, however, Canada presents an emaciated and

wholly inadequate vision of what constitutes an investment. And in so doing, it seriously

weakens the scope of the NAFTA itself.

55. Investments cannot so easily be broken down into discrete packages. Modern

investments consist of whole bundles of assets, rights and interests, all of which are

interrelated. This is the case with Merrill & Ring’s interest in realizing fair value for its

logs on international markets. Once Canada concedes as it has done that Merrill &

Ring holds investments in the form of land, timber, and logs, then it must also

acknowledge that the value of these investments depends on Merrill & Ring’s ability to

realize fair market value for them on international markets. Any restriction imposed on

Merrill & Ring’s ability to do so will have a direct impact on the value of its land, timber

and logs.

56. This ordinary meaning of the term “investment” has been expressly recognized in

NAFTA jurisprudence. As Canada concedes, the Pope & Talbot Tribunal did recognize

that “the investment’s access to the US market is a property interest subject to protection

under Article 1110.” As Canada also rightly points out, the Pope & Talbot Tribunal28

went on to say that:

...the ability to sell softwood lumber from British Columbia to the US is a very important part of

the “business” of the Investment. Interference with that business would necessarily have an

adverse effect on the property that the Investor has acquired in Canada, which, of course,

constitutes the Investment. While Canada’s focus on the “access to the US market” may reflect

only the Investor’s own terminology, that terminology should not mask the fact that the true

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Pope & Talbot at para. 98, as quoted by Canada in its Counter Memorial at para. 273, Respondent’s Book of29

Authorities (Tab 110).

Methanex v. The United States of America, Final Award on Jurisidction and Merits, 2005 WL 195 0817 (August 3,30

2008) Chapter D at 7 8 at para. 17, as cited by Canada in its Counter Memorial at para. 275, Respondent’s Book of


Methanex v. The United States of America, Final Award on Jurisidction and Merits, 2005 WL 195 0817 (August 3,31

2008) at para. 17.

interests at stake are the Investment’s asset base, the value of which is largely dependent on its

export business.29

Of course, the same is true of logs, not just lumber.

57. This same vision of what constitutes an investment was expressed by the Tribunal in

Methanex. Again, as Canada rightly points out, the Tribunal in that case had the

following to say on the matter:

Certainly, the restrictive notion of property as a material “thing” is obsolete and has ceded its place

to a contemporary conception which includes managerial control over components of a process

that is wealth producing. In the view of the Tribunal, items such as goodwill and market share

may...constitute an element of the value of an enterprise and as such may have been covered by

some of the compensation payments. Hence...these items may figure in the valuation.30

Clearly, the Methanex Tribunal did not share Canada’s view that investments must be

concrete, and only protected if they are capable of being bought and sold. Indeed, that

Tribunal recognized that the definition of investment in NAFTA Article 1139 covers

“managerial control over components of a process that is wealth producing”. Merrill &31

Ring has obviously been deprived managerial control over that part of the process that is

most wealth producing sales. Accordingly, following the view of the Methanex

Tribunal, Merrill & Ring’s ability to sell its logs for fair value on the international market

would most certainly qualify as an integral aspect of its investment.

58. Contrary to what Canada suggests, the Feldman Tribunal did nothing to undermine the

clear meaning espoused by the Tribunal in Pope & Talbot that the term “investment” in

Article 1139 covers an investor’s access to the US market. While that Tribunal may have

expressed some doubt that the Investor in that case had a “right” of access to the US

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Feldman v. Mexico at para. 152, Respondent’s Book of Authorities (Tab 49).32

Canada’s Counter Memorial at paras. 279 280. 33

Occidental Petroleum v. Ecuador at para. 81, Investor’s Book of Authorities (Tab 40).34

Occidental at para. 86, Investor’s Book of Authorities (Tab 40).35

market, it did not deny that the Investor had an “interest” in selling its products on the

export market. In any case, the Feldman Tribunal ultimately went on to apply the Pope &

Talbot ordinary meaning standard of investment to the facts of the case before it, thereby

sanctioning it as the standard to follow.32

59. Canada further makes reference to two non-NAFTA cases Occidental v. Ecuador and

the Oscar Chinn Case to support its contention that Merrill & Ring’s interest in

realizing fair value for its logs on the export market is not covered by NAFTA Article

1139. Neither of these, however, is salient to the present case in the manner Canada33

suggests. Since neither claim was made under the NAFTA, neither was guided by the

express wording of Article 1139.

60. The Occidental case involved a dispute over whether the claimant had an investment in

certain VAT refunds. That dispute was governed by the Ecuador-US BIT. The claimant

in that case argued that it had a “right” to certain VAT refunds under Article I(1)(a) of the

BIT, which expressly included certain property rights within the definition of

“investment”. The claimant argued that its right to the VAT refunds was an investment34

per se. On the facts of that case, however, it was highly questionable whether the35

claimant did in fact have a “right” to the VAT refunds. Accordingly, it was not at all

certain that this constituted an “investment” under Article I(1)(a) of the BIT.

61. Unlike the claimant in Occidental, Merrill & Ring is arguing that it has an “interest” not

a “right” to realize fair value for its logs on the international markets. Unlike the

Ecuador-US BIT, such interests are expressly protected by the NAFTA. And unlike the

claimant in Occidental, Merrill & Ring is not arguing that its interest in realizing fair

value for its logs on the international markets is an investment per se. Rather, Merrill &

Ring is claiming that its interest in realizing fair value for its logs on the international

market is part-and-parcel of a larger investment an investment that is protected by

PUBLIC

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Oscar Chinn Case, Permanent Court of International Justice, Britain and Belgium, Judgement (December 12,36

1934), Canada’s Book of Authorties (Tab 23).

Article 1139. Merrill & Ring is not claiming that this interest is a stand alone investment

on its own; rather, its claim is that this is an inextricable part of a bundle of rights and

interests that make up its investment.

62. In the Oscar Chinn Case the Permanent Court of International Justice was guided by the

St. Germain-en-Laye Treaty of 1919, as well as by a Special Agreement between Britain

and Belgium. Unlike the NAFTA, these provided no definition as to what constitutes an36

“investment”. Accordingly, in considering whether the governing treaty and agreement

provided the claimant the type of protection he was seeking, the Court was not instructed

to consider his economic “interests”; rather, it looked to see what he had by way of

“vested rights”. Having determined that the claimant had no such rights, the Court was

unable to extend the protections of the Treaty and Agreement to him. Of course, in the 75

years that have elapsed since the time of that case, investment protection treaties like the

NAFTA have emerged such that they not only expressly contemplate the types of

investments they protect, but actually extend protection to intangible investment interests.

Had the Court in the Oscar Chinn Case been guided by a modern investment protection

treaty such as the NAFTA, the outcome would likely have been very different.

63. In the final analysis, in contrast to Canada’s strained efforts to narrow the definition of

“interest” in Paragraph (h) of NAFTA Article 1139 and of “investment” in NAFTA

Article 1139 more generally a simple and plain reading of this provision clearly shows

that Merrill & Ring’s interest in realizing fair value for its logs on the export market does

in fact qualify as an investment. Referring back to the wording of Paragraph (h), there is

no doubt that Merrill & Ring has committed capital in Canadian territory for the purpose

of conducting economic activity in Canada. There can be no doubt that Merrill & Ring

has an “interest” arising from the commitment of that capital to sell its logs at fair market

value on the world markets. Accordingly, this interest is obviously an “investment”

under Paragraph (h) of NAFTA Article 1139 plain and simple.

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3. Jurisdiction Ratione Temporis: Merrill & Ring’s Claim is Timely

64. While Canada is ready to concede that Merrill & Ring is both an “investor” and has

“investments” for the purposes of NAFTA Article 1139, the main thrust of its objection

to this Tribunal’s jurisdiction relates to NAFTA Article 1116(2). Specifically, Canada’s

entire jurisdictional objection rests on the contention that Merrill & Ring has not brought

this claim forth on a timely basis. The facts of this claim make clear that Canada’s

arguments are not well-taken.

65. These arguments stem in their entirety from the Opinion of Michael Reisman. The

investor formally objects, as a matter of form, for Canada’s improper introduction of

Prof. Reisman’s legal argument on the scope and application of Article 1116(2) by way of

expert evidence. NAFTA Article 1131 provides that the NAFTA and international law

govern this arbitration. Prof. Reisman’s paper is simply a legal argument on his view

about the interpretation of the governing law. It is highly improper to submit expert

evidence about the governing law to a tribunal who must decide under that law. That is

the job of legal counsel to the disputing parties. As a result, Prof. Reisman did not offer

evidence based on his study of the negotiating text of the NAFTA nor based on some

other area where expert evidence may be properly considered. Instead, he has simply filed

arguments, which should properly be considered by this Tribunal in the argument portion

of the hearing. Prof. Reisman should properly be considered as counsel to Canada, and

his opinions treated as legal argument. Given the limited time to present arguments and

examine witnesses at the hearing, it would be prejudicial to Merrill & Ring to have to

spend its time cross-examining Prof. Reisman as if he were a bona fide expert or witness.

Instead, Merrill & Ring will deal with Mr. Reisman’s legal arguments as if they were

part-and-parcel to Canada’s legal argument in its Counter-Memorial.

a. There are Several Related “Measures” at Issue in this Dispute

66. In order to understand how this fits with the requirements of the NAFTA, it is crucial to

have an understanding of exactly what measures Merrill & Ring’s claim are based on.

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See, for example, Canada’s Counter Memorial at para. 206, where it refers to the “measure” Merrill & Ring seeks37

to arbitrate. This use of the term “measure” in singular form demonstrates that Canada thinks there is only one

measure at issue.

Reisman Legal Opinion, April 22, 2008 at para. 3 B (ii).38

Loewen, Award on Jurisdiction at para. 40, Respondent’s Book of Authorities (Tab 75).39

Fisheries Jurisdiction at para. 65, Investor’s Book of Authorities (Tab 129). 40

67. Canada asserts that there is one, and only one, measure at issue in this dispute namely,

Notice 102 and that specific applications of the administrative requirements of Notice37

102 do not constitute “measures”. Canada is plainly mistaken. There are indeed several38

measures at issue in this dispute, some of which relate to Notice 102, others that do not.

This basic misunderstanding by Canada goes to the very root of its misplaced objections

to the timeliness of this claim.

68. NAFTA Article 201(1) defines the term “measure” in the NAFTA in very broad terms:

For the purpose of this Agreement, unless otherwise specified...measure includes any

law, regulation, procedure, requirement or practice. (Emphasis in original)

As is clear from the express wording of this provision, the list of measures is non-

exhaustive; it “includes” but is not limited to laws, regulations, procedures,

requirements or practices. There are, therefore, other governmental acts that are not listed

on the face of Article 201(1) which may also qualify as “measures”.

69. As is also evident from the spectrum of measures laid out in NAFTA Article 201(1), a

measure may range from something that is formal and “legal” in nature such as a “law” or

“regulation”, to something that is more informal such as a “requirement” or “practice”.

Clearly, the range of measures contemplated by Article 201(1) is very broad.39

70. The broad scope of the ordinary meaning of the term “measure” has been confirmed time

and again in international jurisprudence. In the Fisheries Jurisdiction Case, Canada itself

argued that the term “measure” is a “generic term”. In its decision, the International40

Court of Justice had the following to say:

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Fisheries Jurisdiction at para. 66, Investor’s Book of Authorities (Tab 129).41

Ethyl Corp v. Canada (Jurisdiction Award) at para. 66, Respondent’s Book of Authorities (Tab 45).42

...in its ordinary sense the word [measure] is wide enough to cover any act, step or proceeding, and

imposes no particular limit on their material content or on the aim pursued thereby.41

For the ICJ, then, it is clear that there are few restrictions on the meaning of the term

“measure”. This understanding is reflected in the very words of NAFTA Article 201(1).

71. The breadth to be accorded the term “measure” in NAFTA Article 201(1) was confirmed

in the NAFTA context by the Tribunal in Ethyl. That Tribunal stated as follows:

In addressing what constitutes a measure, the Tribunal notes that Canada’s Statement on

Implementation of the North American Free Trade Agreement... (at 80) states that: “The

term measure is a non-exhaustive definition of the ways in which governments impose

discipline in their respective jurisdictions.”... This is borne out by Article

201(1)...Clearly, something other than a “law”, even something in the nature of a

“practice”, which may not even amount to a legal stricture may qualify.42

72. Beyond the express wording of Article 201(1), the objectives of the NAFTA also indicate

that it is meant to apply to a broad spectrum of measures. The objectives of the NAFTA

are laid out in Article 102(1). These objectives include:

• eliminating barriers to trade in, and facilitating the cross-border movement

of, goods and services between the territories of the Parties;

• promoting conditions of fair competition in the free trade area; and

• creating effective procedures for the implementation and application of the

NAFTA, for its joint administration and for the resolution of disputes.

NAFTA Article 102(2) goes on to specify that these objectives are to be used to guide the

interpretation and application of the various provisions of the NAFTA, including Articles

201(1) and 1116(2).

73. Using the NAFTA’s objectives to guide the meaning of Article 201(1) suggests that the

term “measure” should be interpreted broadly. Any other approach would defeat the

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Loewen, Award on Jurisdiction at para. 53, Respondent’s Book of Authorities (Tab 75).43

NAFTA Article 901(1). [emphasis added]44

purpose and object of the NAFTA by allowing “loop-holes” through which those forms

of governmental conduct not expressly laid out in Article 201(1) but that otherwise still

violate the substantive obligations the NAFTA would fall through. The result would be

that various forms of governmental action that are inconsistent with the NAFTA would

be immune from challenge, simply because it was not expressly captured by Article

201(1). This would not only be inconsistent with the plain wording of Article 201(1), but

also with the fundamental objectives of the NAFTA.

74. The overall context of the NAFTA provides further support for a broad interpretation of

the term “measure”. As the Tribunal in Loewen noted:

The text, context and purpose of Chapter Eleven combine to support a liberal rather than a

restricted interpretation of the words “measures adopted or maintained by a Party”, that is, an

interpretation which provides protection and security for the foreign investor and its investment.43

75. The context provided by the various provisions of the NAFTA demonstrate that a

measure need not be singular and distinct in-and-of-itself; rather one measure can relate

to and derive from another measure. For example, in laying out the scope and coverage

of the NAFTA’s Chapter 9 on standards related measures, Article 901(1) states:

This Chapter applies to standards related measures of a Party...that may, directly or indirectly,

affect trade in goods or services between the Parties, and to measures of the Parties relating to

such measures.44

We can see that the drafters intended the NAFTA to cover not only governmental

measures per se, but also to cover measures relating to those measures.

76. That one measure may derive from another measure is also evidenced throughout Annex

301.3 to the NAFTA. Annex 301.3 lays out the various exceptions to NAFTA’s

obligations relating to trade in goods set out in Articles 301-309. Section A of Annex

301.3 lists the exceptions with respect to Canadian measures. Paragraph 4 of this Section

provides as follows:

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See NAFTA Annex 301.3, Section A, para. 4; Annex 301.3, Section B, para. 2(a); Annex I and Annex V.45

S.D. Myers v. Canada, First Partial Award, 40 ILM 1408 at para. 322, Investor’s Book of Authorities (Tab 39).46

ILC Articles, Art. 1 [emphasis added], Investor’s Book of Authorities (Tab 130).47

Articles 310 and 309 shall not apply to quantitative import restrictions on goods...for as long as the

measures taken under the Merchant Marine Act of 1920... and the Merchant Marine Act of

1936...apply.

From this section, it is clear that one measure may not only relate to, but also derive from

another measure. Since it is legislation, there can be no dispute that the Merchant Marine

Act is a “measure” within the scope of Article 201(1). And since this paragraph expressly

addresses “measures taken under the Merchant Marine Act”, it is clear that one measure

may derive from another, yet still be a distinct measure in-and-of-itself.

77. Annex 1010.1 of the NAFTA together with a whole array of other Annex provisions 45

clarifies that not only may one measure derive from another, but that the subsidiary

measure can be a judicial decision, or even an administrative ruling or procedure. Section

B of NAFTA Annex 1010.1 lays out the various publications for what it refers to as

“Measures in Accordance with Article 1019 (Provision of Information)”. Paragraph 2 of

this section lists the publications for “precedential judicial decisions”. This makes clear

that judicial decisions are considered to be “measures”. Similarly, paragraph 3 lists the

publications for “administrative rulings and procedures”. This makes plain the fact that

such rulings and procedures also constitute “measures”. Since judicial decisions, as46

well as administrative rulings and procedures are all made pursuant to either statute or

regulation, it is clear from Annex 1010.1 that the drafters intended the NAFTA to apply

to a wide variety of “measures”, many of which may relate to and derive from other

“measures”.

78. The understanding that particular administrative applications of a regulatory regime can

and do constitute “measures” for the purposes of Article 201(1) is further supported by

the International Law Commission’s Articles on State Responsibility (“ILC Articles”).

Article 1 of the ILC Articles states:

Every internationally wrongful act of a State entails the international responsibility of that State.47

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As Article 1 makes clear, it is not just some wrongful acts that give rise to State

responsibility as Canada would have it but rather every wrongful act. This includes

not only the legislative and policy framework of the Log Export Control Regime, but also

every administrative application of that framework to Merrill & Ring.

79. Article 2 of the ILC Articles lends further support to this view:

There is an internationally wrongful act of a State when conduct consisting of an action or

omission:

(a) is attributable to the State under international law; and

(b) constitutes a breach of an international obligation of the State.48

That international responsibility flows from State “conduct” implies that such

responsibility does not just stem from the existence of a regulatory regime, but also from

the application of that regime in concrete circumstances.

80. While Articles 1 and 2 strongly suggest that the measures at issue in this dispute need not

be confined to the legislative and policy framework of the Log Export Control Regime

itself, and do in fact include administrative applications of that Regime in particular

circumstances, Article 12 provides definitive support:

There is a breach of an international obligation by a State when an act of that State is not in

conformity with what is required of it by that obligation, regardless of its origin or character.49

From this, it is clear that for the purposes of this international dispute, and consistent with

the broad definition of “measure” in NAFTA Article 201(1), individual administrative

actions taken pursuant to the Log Export Control Regime do constitute “measures” in-

and-of-themselves.

81. All the foregoing provides cogent support for the notion that the general presumption at

play here is exactly the reverse of what Mr. Reisman proposes; measures that nullify and

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Prof. Robert Howse considers this same issue and comes to a same conclusion as the Investor See the Expert50

Legal Opinion of Robert Howse at paras. 14 20.

impair benefits under a treaty are not only comprised of laws and policies per se, but also

the individual application of those laws and policies in particular circumstances. And50

while it is true that this approach is consistent with international law generally, it is

important to remember that, at a fundamental level, it is supported by a plain and

commonsense understanding of the measures expressly contemplated by NAFTA Article

201(1). On its face, NAFTA Article 201(1) recognizes both “laws” and “regulations” as

measures. It is irrefutable that a regulation (which is one type of measure) may derive

from a law (which is another type of measure). It is also clear that both a law and a

regulation are measures that may run afoul of the NAFTA in-and-of-themselves. The

validity of the one does not necessarily imply the validity of the other. Just because a

“law” may be in conformity with the NAFTA does not mean that a regulation or

administrative decision taken pursuant to that law is also in conformity with the NAFTA.

Each are distinct measures that need to be taken on their own terms.

82. Nowhere is this more important than in dealing with the temporal limitations of NAFTA

Article 1116(2). While one measure may be seen to run afoul of the three year time-bar,

another measure may not. Thus, in considering this matter it is important to be very clear

about exactly what the various measures in dispute actually are.

b. There are Both Continuing and Non-Continuing Measures at Issue

in this Dispute

83. Merrill & Ring has clearly asserted that there are two general types of measures at issue in

this dispute: (i) continuing measures; and (ii) non-continuing measures. There are several

measures within each category. In the following sections, we shall thresh out exactly

what measures fit within each category.

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Investor’s Memorial at paras. 455 462. See also the Expert Legal Opinion of Robert Howse at para. 28.51

ILC Articles, Art. 14(2), Investor’s Book of Authorities (Tab 130).52

See Expert Legal Opinion of Robert Howse at paras. 29 32.53

Prof. Howse has given consideration to this issue and has come to similar conclusions. See the Expert Legal54

Opinion of Robert Howse at paras. 33 36.

i. There are Several Continuing Measures in Dispute

84. As Merrill & Ring has pointed out, continuing measures are well recognized under

international law. This is recognized by Article 14(2) of the ILC Articles:51

The breach of an international obligation by an act of a State having a continuing

character extends over the entire period during which the act continues and remains not

in conformity with the international obligation.52

85. Despite this general principle, States may draft treaties in such a way as to avoid liability

for regulatory regimes that predate the entry into force of a treaty that would otherwise

violate the terms of those treaties. For example, some treaties contain provisions that

“grandfather” some or all statutory and/or regulatory schemes in existence at the time the

treaty enters into force. Other treaties contain reservations that allow the Parties to53

maintain pre-existing regulatory regimes that would otherwise violate the terms of those

treaties. The effect of such provisions is that the treaty Parties can continue to apply the

schemes in question even if doing so would otherwise violate the provisions of a treaty.

86. The drafters of the NAFTA were well aware of techniques such as these. Thus, if they

wanted to limit state responsibility for post-NAFTA conduct flowing from pre-NAFTA

regulatory regimes, they knew how to do so expressly. And indeed, they chose to do so

expressly in the Parties’ respective Schedules to Annex I of the NAFTA. This provides

conclusive evidence that the drafters did not intend to nullify the principle of continuing

breach in its entirety in the context of the NAFTA, but rather chose to manage that

principle in particular contexts through the use of reservations.54

87. That the drafters of the NAFTA intended for it to apply to continuing measures is also

evident in specific provisions of the NAFTA itself. In particular, NAFTA Article 1101

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Reisman’s Affidavit, April 22, 2008 at para. 38.55


specifies that Chapter 11 applies to measures that are “maintained” by a Party. These are

measures that a Party initiates at one point in time, and maintains over a longer period of

time. Continuing measures relate to the existence of certain laws, regulations,

procedures, requirements and practices per se. In the context of the present dispute,

continuing measures are those that were brought into existence before December 27,

2003, but that Canada maintained beyond that date.

88. Despite all evidence to the contrary, Canada denies that the law of continuing breach

applies in the NAFTA context, arguing that Article 1116(2) is lex specialis that wholly

displaces this general legal principle. This stands in stark contrast to Canada’s55

admission that the NAFTA “authorises investors to make Chapter Eleven claims based on

continuing measures.” As we have seen, it is also at odds with the plain wording of56

NAFTA Article 1101 which recognizes measures that are “maintained” by a Party as

well as with the treaty drafting practices of the NAFTA Parties themselves.

89. The measures at issue in this dispute that are of a continuing nature can be broken down

into three categories:

i) those taken exclusively by the federal government;

ii) those taken exclusively by the BC provincial government; and

iii) those taken jointly by the federal and provincial governments.

90. The continuing measures at issue in this dispute that have been and continue to be

taken exclusively by the federal government all relate to Notice 102. Notice 102 came

into effect on April 1, 1998. Notice 102 has been in continuous effect ever since that

date, and continues to apply today.

91. While Notice 102 is itself a continuing measure, so too are the various requirements

associated with its administration. These requirements include the following:

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Notice 102, s. 1.4, Investor’s Schedule of Documents (Tab 22).57




BC Export Procedures, s. 3.7, Investor’s Schedule of Documents (Tab 31).61

• the requirement to advertise federal logs in accordance with the

“remoteness” rule;57

• the requirement to subject federal logs to the Federal Surplus Testing

Procedure and sell those logs on the BC market;58

• the requirement to cut and sort federal logs according to so-called “normal

market practices”, such as the Coast Domestic Market End Use Sort

Descriptions; and59

• the requirement to scale federal logs according to the metric system.60

Like Notice 102 itself, each of these requirements has been in continuous effect since

April 1, 1998.

92. The continuing measures at issue in this dispute that have been and continue to be

taken exclusively by the BC government all relate to the BC Export Procedures. BC

Export Procedures came into effect in July 1999. This policy has been in continuous

effect ever since that date, and continues to apply today.

93. Like Notice 102, while the BC Export Procedures is itself a continuing measure, so too

are the various requirements it embodies. These requirements include the following:

• the requirement to subject provincial logs to the Provincial Surplus

Testing Procedure and sell those logs on the BC market;61

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• the requirement to cut and sort provincial logs according to so-called

“normal market practices”, such as the Coast Domestic Market End Use

Sort Descriptions;62

• the requirement to scale provincial logs according to the metric system;63

and

• the requirement to pay a fee-in-lieu-of-manufacture for provincial logs

upon export.64

94. Finally, the continuing measures at issue in this dispute that have been and continue to

be taken jointly by the federal and BC governments relate only to the issue of standing

timber. There are three measures that fall within this category:

• the measures allowing standing applications only for timber in the BC

Interior, and not for timber on the BC Coast;

• the measures allowing standing exemptions only for provincial lands, and

not for federal lands; and

• the measures allowing standing exemptions for provincial lands only

outside the South-Coastal region of BC.

All three of these decisions/policies were made prior to December 27, 2003, have applied

continuously ever since, and continue to apply today.

ii. There are Several Non-Continuing Measures in Dispute

95. In contrast to continuing measures, non-continuing measures are contemplated by

NAFTA Article 1101 as measures that are “adopted”, and not those measures that are

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Reisman Legal Opinion, April 22, 2008 at para. 3 A (iv).65

“maintained”. They are measures that are adopted at a discrete point in time. Unlike the

continuing measures at issue in this claim, the non-continuing measures do not arise from

the very existence of a law, regulation, procedure, requirement or practice per se; rather,

they arise from the specific application of such a law, regulation, procedure, requirement

or practice to a foreign investor. Non-continuing measures are not applied over a period

of time. They are adopted once, and only once. In the context of the present claim, non-

continuing measures are the particular application of the rules of the Log Export Control

Regime to Merrill & Ring at particular points in time between December 27, 2003 and

December 27, 2006.

96. Canada denies that Merrill & Ring may bring a claim with respect to non-continuing

measures in this case. Canada’s argument is summarized as follows:

Where the measure alleged to have caused the breach is a long-standing and routinely

applied regulatory regime and the investor had or should have had knowledge of both the

regime and the economic costs of its routine application from prior applications, that

investor may not evade the three year limitation and challenge the lawfulness under

NAFTA of the regulatory regime by claiming that the “measure” is actualized or

materialized in each recurring, routine and proper application of that regulatory regime.65

This position is wholly unsupported and amounts to a novel proposition of law. This

position flies in the face of the broad definition of “measure” in NAFTA Article 201(1),

particularly in the context of the objects and purposes of the NAFTA. It also stands in

stark contrast to general principles of international law, as enshrined by Articles 1, 2 and

12 of the ILC Articles.

97. Just as with the continuing measures, the non-continuing measures at issue in this dispute

may also be split up into three categories:

i) those taken exclusively by the federal government;

ii) those taken exclusively by the BC provincial government; and

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iii) those taken jointly by the federal and provincial governments.

98. Just as with the continuing measures, the non-continuing measures in this dispute taken

exclusively by the federal government all relate to Notice 102. However, while on the

one hand the continuing measures are the polices and requirements of Notice 102, on the

other hand, the non-continuing measures are the distinct applications of those policies and

requirements to Merrill & Ring between December 27, 2003 and December 27, 2006.

Thus, the federal non-continuing measures at issue in this dispute are as follows:

• each time between December 27, 2003, and December 27, 2006, that

Merrill & Ring was required to advertise its logs in conformity with the

so-called “remoteness rule”, or otherwise circumvent that rule;


Merrill & Ring was required to subject its federal logs to the Federal

Surplus Testing Procedure and sell those logs on the BC market;


Merrill & Ring was required to cut and sort its federal logs according to

so-called “normal market practices”; and


Merrill & Ring was required to scale its federal logs according to the

metric system.

99. Similarly, just as with the continuing measures, the non-continuing measures in this

dispute taken exclusively by the provincial government all relate to the BC Export

Procedures. The difference between the continuing and non-continuing provincial

measures is the same as the difference between the continuing and non-continuing federal

measures. Thus, the non-continuing provincial measures are as follows:


Merrill & Ring was required to submit its provincial logs to the Provincial

Surplus Testing Procedure;

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Merrill & Ring was required to cut and sort its provincial logs according to

so-called “normal market practices”, such as the Coast Domestic Market

End Use Sort Descriptions;


Merrill & Ring was required to scale its provincial logs according to the

metric system; and


Merrill & Ring was required to pay a fee-in-lieu-of-manufacture for

provincial logs upon export.

100. Finally, just as with the continuing measures, the non-continuing measures at issue that

were taken jointly by the federal and provincial governments all relate to the issue of

standing timber. Again, the same distinction between continuing and non-continuing

measures applies. Thus, the non-continuing measures taken jointly by the federal and

provincial governments include the following:


Merrill & Ring was not allowed to advertise its logs under a standing

application (i.e. each time Merrill & Ring was required to advertise logs

as opposed to standing timber on either the Federal or Provincial Bi-

Weekly Lists);


Merrill & Ring was disallowed from exporting its federal logs under a

standing exemption due to the policy of not allowing standing exemptions

for federal lands (i.e. each time Merrill & Ring was required to sell its

federal logs domestically); and


Merrill & Ring was disallowed from exporting its provincial logs under a

standing exemption due to the policy of not allowing standing exemptions

for any lands on the BC South-Coast.

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iii. Continuing and Non-Continuing Measures May be Based

on the Same Factual Background

101. Contrary to what Canada asserts, there is nothing contradictory about a measure having

both a continuing and non-continuing inflection to it.66

102. For example, the Surplus Testing Procedure for federal logs was enshrined into Notice

102 on April 1, 1998. Since it is a “procedure”, it clearly qualifies as a “measure” under

NAFTA Article 201(1). The Surplus Testing Procedure has been in effect on a

continuous basis ever since Notice 102 was implemented. This measure has been

continuously applied to Merrill & Ring every time it has sought to export its logs since

that time.

103. The Surplus Testing Procedure has a double aspect: one that is of a continuing nature

the other that is of a non-continuing nature. On the one hand, the continuing nature of the

Surplus Testing Procedure stems from its existence per se. On the other hand, the non-

continuing nature of the Surplus Testing Procedure derives from its discrete application to

Merrill & Ring in particular, and concrete circumstances.

104. The very existence of the Surplus Testing Procedure has a serious impact on the log

production industry as a whole. By forcing aspiring log exporters to first offer up their

logs on the domestic market, this measure suppresses the domestic market price of logs.

This occurs since domestic supply is increased (because it stems the flow of logs

overseas), while domestic demand remains unaffected. Basic economics tells us that the

result is a decrease in the domestic price of logs. This artificially suppressed domestic

market price sets the price at which all log producers sell when they offer their logs on the

domestic market. Every time Merrill & Ring is forced to enter in a “blockmail” deal, or

is otherwise forced to sell its logs on the domestic market, it is the continuous application

of this measure that results in Merrill & Ring having to sell at the suppressed market

price. As a result, Merrill & Ring continuously incurs damage from the continuing

existence of this measure.

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Canada’s Counter Memorial at paras. 149 151.68

105. By contrast, the non-continuous nature of the Surplus Testing Procedure stems from its

specific application to Merrill & Ring. This occurs each time Merrill & Ring actively

applies to export its logs. Each and every time it wants to export, it is required to submit

its logs to the Surplus Testing Procedure. As a result, each application of the Surplus

Testing Procedure to Merrill & Ring constitutes a “requirement” under NAFTA Article

201(1). Each and every time Canada requires Merrill & Ring to submit its logs to this

procedure, it applies a measure to Merrill & Ring. Merrill & Ring incurs damage each

and every time such a measure is applied to it.

c. Merrill & Ring’s Claim is Not Time-Barred by NAFTA Article

1116(2)

106. NAFTA Article 1116(2) places a limitation period on claims brought forth under NAFTA

Chapter 11. It states:

An investor may not make a claim if more than three years have elapsed from the date on

which the investor first acquired, or should have first acquired, knowledge of the alleged

breach and knowledge that the investor has incurred loss or damage.

107. There are two prerequisite conditions for the timing to commence on the three year

limitation period in NAFTA Article 1116(2). First, the investor must have acquired

actual or constructive knowledge of the breach at issue. Second, the investor must have

acquired knowledge that it has incurred loss or damage as a result of that breach. It is

only the point in time when the investor has acquired knowledge in both of these respects

that the limitation period begins to run.

108. According to Canada, the plain wording of NAFTA Article 1116(2) indicates that under

no circumstance may an investor bring forth a claim three years after first acquiring actual

or constructive knowledge of both the alleged breach, and loss flowing from that breach. 67

To support its argument, Canada places great weight on the word “first” as it appears in

Article 1116(2).68

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See also the Expert Legal Opinion of Robert Howse at paras. 38 40.70

Grand River, Jurisdiction Decision at para. 8, Respondent’s Book of Authorities (Tab 57). 71

Grand River, Jurisdiction Decision at para. 10, Respondent’s Book of Authorities (Tab 57).72





109. Canada also relies heavily on the decision of the Tribunal in Grand River. While timing69

was a key issue before the Grand River Tribunal, that Tribunal’s decision was based on

facts and arguments that are significantly different than those at issue in the present case.

Accordingly, the decision in Grand River is of only limited pervasive value for the issues

raised in the present arbitration.70

110. Grand River was a case in which a Canadian company that together in association with

various First Nations groups manufactured and traded in cigarettes in the US. The basic

measure in Grand River was a 1998 agreement entered into between various US states

and cigarette manufacturers to settle a Tobacco litigation dispute. This agreement

required the signatory companies to pay into a central account a certain amount of money

for each cigarette sold, the sum of which would be divided between the participating US

states. The claimants were not a party to the agreement. The agreement further71 72

stipulated that participating US states would adopt escrow legislation that would require

non-participating companies to pay an amount roughly equal to what they would have had

to pay if they were parties to the agreement. All of the participating US states adopted73

this escrow legislation in 1999 and 2000. Thereafter, in 2001 and 2002 participating74

states enacted complementary legislation to strengthen enforcement of the escrow laws,75

which were then amended in 2003 and 2004. These all constituted subsequent measures76

taken pursuant to the original agreement and the escrow laws. The claimants brought

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Grand River, Jurisdiction Decision at paras. 1 & 4, Respondent’s Book of Authorities (Tab 57).77

Grand River, Jurisdiction Decision at para. 83, Respondent’s Book of Authorities (Tab 57). 78



forth their claim under NAFTA Chapter 11 in March 2004, some six years after the

original agreement, and some four to five years after the escrow laws.77

111. As Canada rightly points out, the Tribunal in Grand River ruled that the claimant was

time-barred from seeking recourse to a number of the measures in dispute. What Canada78

neglects to mention, however, is that the Grand River Tribunal did not strike out those

measures that were taken within three years of the initiation of the claim, even though

those measures were inextricably linked to the previous measures the Tribunal did strike

out.79

112. Canada also underemphasizes the importance of the quantifiability of the loss suffered by

the investor in Grand River. In deciding that the investor’s challenge to the escrow

statutes was time-barred, the Tribunal had the following to say:

The Tribunal believes that becoming subject to a clear and precisely quantified statutory obligation

to place funds in an unreachable escrow for 25 years...is to incur loss or damage as those terms are

ordinarily understood.80

While the investor in Grand River may not have been able to quantify in exact terms what

the extent of its loss would be at the time the escrow statutes were passed, it was as the

Tribunal put it subject to a “clear and precisely quantified statutory obligation”. This

stands in stark contrast to the facts of the present dispute. There was nothing clear and

precise about the losses Merrill & Ring would suffer at the time the Notice 102 and the

BC Export Procedures were adopted. Such losses could only be quantified with any

degree of predictability or precision at the time these measures were applied to Merrill &

Ring in specific instances.

113. Yet perhaps the most crucial distinction between Grand River and the present claim has

to do with the particular measures at issue in each case. Specifically, all the measures

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Grand River, Jurisdiction Decision at paras. 89 & 90, Respondent’s Book of Authorities (Tab 57).81


United Postal Service v. Canada, Merits, June 11, 2007 at para. 28 [emphasis added], Investor’s Book of83


impugned by the investor in Grand River were the various statutes and laws themselves. 81

Unlike Merrill & Ring, the investor in that case made no attempt to challenge the specific

application of those statutes and laws to it in particular circumstances as separate

measures in-and-of-themselves. That is, unlike the present case, none of the measures at

issue in Grand River involved administrative decisions or procedures taken pursuant to

laws and regulations; rather, the only measures at issue were the laws and regulations

themselves. As a result, Canada’s assertion that Grand River fully answers Merrill &

Ring’s claim about non-continuing measures is patently false.82

114. In contrast to its heavy reliance on Grand River, Canada seeks to have this Tribunal turn a

blind-eye to the recent finding by the UPS Tribunal that recognizes that Article 1116(2)

does not place an absolute limit on claims in the way Canada suggests. Given that the

UPS Tribunal rendered its decision after Grand River, it obviously chose to disregard that

case. As the Tribunal in UPS made abundantly clear, “continuing courses of conduct

constitute continuing breaches of legal obligations and renew the limitation period

accordingly.”83

115. In the context of NAFTA Article 1116(2), this Tribunal must pay attention to all the

measures at issue in this dispute. It is important to keep in mind the basic distinction

between the continuing and non-continuing measures at play.

116. There is no doubt that Merrill & Ring knew of each of the continuing measures before

December 23, 2003. Merrill & Ring knew about Notice 102 together with its various

requirements back in 1998. Merrill & Ring also has known for a long time about the

BC Export Procedures in 1999.

117. The issue with the continuing measures in this dispute is not when Merrill & Ring

became aware of the measures themselves, but rather when it became aware of the loss

flowing from these measures. The question here is: what type of knowledge of loss

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flowing from the continuing measures is Merrill & Ring required to have? Is it sufficient

for the purposes of Article 1116(2) that Merrill & Ring knew that it incurred loss in some

abstract sense? Or must Merrill & Ring instead have concrete knowledge of the actual

loss it has incurred as a result? As the decision in Grand River suggests, Article 1116(2)

must be interpreted to mean that Merrill & Ring must have concrete knowledge of actual

loss, or at least be able to predict with some degree of certainty what its loss flowing from

a continuous measure will be. Such was not the case.

118. NAFTA Article 1116(2) appears on its face only to require that Merrill & Ring have

acquired knowledge of loss in an abstract sense. However, when viewed in light of the

objects and purposes of the NAFTA as required by Article 31(1) of the Vienna

Convention it becomes evident that concrete knowledge of actual loss is what is

required. This is because one of the basic objectives of the NAFTA as set out in Article

102 is “to create effective procedures...for the resolution of disputes.” If it were true that

the limitation period envisaged by Article 1116(2) could begin to run once a foreign

investor had only an abstract sense that it was incurring loss from a certain measure, this

would run counter to the objective of creating effective procedures for the resolution of

disputes. Without actual knowledge of quantifiable loss, a foreign investor would not be

able to specify the damages it seeks to recover in any given claim. Without being able to

specify damages, any claim an investor might bring forth would be pointless.

Accordingly, if the limitation period of NAFTA Article 1116(2) were to commence

before the foreign investor had actual knowledge of the quantifiable loss, the dispute

resolution provisions of Chapter 11 would be ineffective. This would not only run

counter to the basic objectives of the NAFTA, but would indeed give rise to an absurd

result.

119. It is precisely at this point where the concept of continuing breach dovetails with that of

non-continuing breach. Merrill & Ring could not know of the loss it incurred from

Canada’s continuing measures until those measures were actually applied to it in concrete

situations. That is, the time-bar on continuing measures could not possibly start to run

until those measures were applied to Merrill & Ring in particular circumstances. And

since the application of continuing measures in particular circumstances constitute

separate “non-continuing” measures in-and-of-themselves, the clocks on both continuing

and non-continuing measures start to run at exactly the same time. It is here where

continuing breaches and non-continuing breaches elide one into the other and become, for

all practical intents and purposes, indistinguishable.

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120. Merrill & Ring has brought forth this claim within the limitation period envisaged by

NAFTA Article 1116(2). Each application of the various rules and policies of the Log

Export Control Regime (i.e. the “continuing” measures) to Merrill & Ring constitutes a

separate “non-continuing” measure in-and-of-itself. For each non-continuing measure

Merrill & Ring acquired instantaneous knowledge of both the breach itself, and the loss

flowing from that breach. Thus, the clock on the three year limitation period for the non-

continuing measures at issue in this dispute started as soon as the measures were taken.

The only non-continuing measures Merrill & Ring impugns are those that were taken

between December 27, 2003 and December 27, 2006. Since Merrill & Ring initiated this

claim on December 27, 2006, there can be no dispute that all of the non-continuing

measures at issue in this claim fall within the three year limitation period.

d. Merrill & Ring’s Claim Represents a Balanced Approach to the

Limitation Period Envisaged by Article 1116(2)

121. Not only does Merrill & Ring’s interpretation of the limitation period envisaged by

Article 1116(2) stay true to the wording of the provision in light of its objects and

purpose, but it also makes practical sense. Indeed, this interpretation strikes a careful and

appropriate balance between the rights and responsibilities of the NAFTA Parties, on the

one hand, and, on the other, those of foreign investors.

122. Canada suggests that Merrill & Ring’s approach “would render NAFTA Article 1116(2)

ineffective.” Canada fears that sanctioning Merrill & Ring’s arguments would open up84

the floodgates to Chapter 11 claims based on measures that predated the NAFTA,85

thereby creating legal uncertainty and instability for the NAFTA Parties. Canada’s fears86

are not well-founded.

123. NAFTA Article 1116(2) represents an attempt to balance two sets of competing interests.

On the one hand, it recognizes the interest of foreign investors to seek recourse to Chapter

11 arbitration for wrongs they have suffered at the hands of a NAFTA host state. On the

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other hand, Article 1116(2) recognizes the interest of the NAFTA Parties not to be

subject to potentially limitless claims by foreign investors for measures taken too far back

in the past particularly those taken prior to the entry into force of the NAFTA. Article

1116(2) strikes a balance between these competing interests by establishing a three year

limitation period for foreign investors to bring forth their claims.

124. Merrill & Ring acknowledges that this balance does not allow a foreign investor to reach

back in time more than three years from the time it first acquired, or should have acquired

knowledge of the alleged breach, and first acquired knowledge that it had incurred

damage as a result. Nothing in Merrill & Ring’s arguments suggest that a foreign

investor could seek compensation for losses it suffered as a result of measures taken more

than three years prior to initiating a claim, provided that it was also able to quantify the

damage that flowed therefrom more than three years prior to that claim. Thus, nothing in

Merrill & Ring’s argument would render NAFTA Article 1116(2) ineffective, or

otherwise open up the floodgates to Chapter 11 claims and potentially limitless liability.

125. Indeed, Merrill & Ring’s approach fully acknowledges that NAFTA Article 1116(2) does

provide boundaries to the potential liability faced by NAFTA Parties for their otherwise

unlawful acts namely, three years of damages. This is reflected on the very facts of this

claim: Merrill & Ring is only seeking compensation for the damages it suffered between

December 27, 2003 and December 27, 2006. In light of the limitations of Article

1116(2), Merrill & Ring is not seeking damages for the losses it suffered prior to

December 27, 2003, even though it did indeed suffer such losses. Merrill & Ring

advances an approach that appropriately recognizes the fundamental balance sought by

NAFTA Article 1116(2).

126. By contrast, Canada argues for an asymmetrical approach to NAFTA Article 1116(2) that

would absolve it of any and all liability for any future NAFTA violations it perpetrates

against Merrill & Ring. According to Canada, if a foreign investor fails to bring forth a

claim within three years regardless of whether or not the investor was actually able to

quantify the loss it suffered a Party should be excused from liability for any and all

actions taken pursuant to that measure ad infinitum into the future. For Canada, there can

be no measures taken pursuant to other measures. For Canada, it makes no difference if it

maintains a measure beyond the three year limitation period, and continues to inflict

damage upon a foreign investor by adopting other distinct measures pursuant to the

original and continuing measure. If a foreign investor does not bring forth its claim

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within three years of the original measure, it forever loses its right to seek recourse to

Chapter 11 arbitration even for related measures taken at a later time. For Canada, once

the three year window on the original measure closes, it is free to continue to violate its

NAFTA obligations forever with impunity, irrespective of any further measures it may

take pursuant to the original measure. There is no balancing of rights and interests in this

vision of NAFTA Article 1116(2). Canada’s approach cannot and does not represent the

balance between state and investor rights sought by NAFTA Article 1116(2), nor is this

view consistent with the objects and purposes of the NAFTA.

127. For all the foregoing reasons, Merrill & Ring has brought forth its claim in a timely

manner that is not barred by NAFTA Article 1116(2). The Tribunal should assert its

rightful jurisdiction and consider the merits of this claim accordingly.

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The Investor continues to rely on the arguments made in the Investor’s Memorial, February 13, 2008 at paras. 35987

362.

III. ARTICLE 1102 - NATIONAL TREATMENT

1. Overview

128. Through the Log Export Control Regime, there can also be no doubt that Canada has

violated its obligation under NAFTA Article 1102 to accord Merrill & Ring "national

treatment".87

129. The purpose of national treatment is to ensure that investors and the investments of

investors from the United States or Mexico receive treatment equivalent to that provided

to the most favorably treated Canadian investor or its investment. The purpose of the

obligation is clear: it is to ensure that Canadian governments do not find ways to provide

better treatment to locals than that provided to foreigners. Similarly, NAFTA Article

1103 provides a similar obligation to provide the best treatment provided to investors of a

third state. Through NAFTA Article 1104, it is clear that the NAFTA’s intent is to

provide the investments of an investor from another NAFTA party with the best treatment

provided in like circumstances in the jurisdiction.

130. The principle of national treatment is well-known in international law. It is so well-

known that this obligation appears in six NAFTA chapters and it is one of three

interpretative principles and rules of the NAFTA pursuant to NAFTA Article 102(2).

131. In its Counter-Memorial Canada has advanced a highly artificial construction of national

treatment. Canada’s construction is obviously designed to assist its defense of this case,

but Canada’s theory is inconsistent with the fundamental principles which underscore the

meaning of national treatment. Furthermore, Canada’s approach is inconsistent with the

obvious context, meaning and objectives of the treaty. By comparison, the Investor sets

out a detailed definition of the national treatment obligation that is based on careful

examination of the negotiation history of the NAFTA, the NAFTA’s text, principles,

rules and objectives and upon the decisions of other international economical law

tribunals.

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132. The evidence produced by the Investor demonstrates that Merrill & Ring is in “like

circumstances” with log producers who export logs from other parts of Canada and from

other parts of the province of British Columbia. In addition, Merrill & Ring is also in

“like circumstances” with other log producers who export logs, including those located

on the coast of British Columbia. As a result, this Tribunal must take into account

situations where more favourable treatment has been provided to log producers who are

in “like circumstances” with Merrill & Ring.

133. Log producers in other parts of Canada are not subjected to the onerous and confiscatory

requirements of the Log Export Control Regime as practiced in British Columbia by

Canada. There are obviously treated more favourably. Moreover, other log producers who

operate in the province of British Columbia are treated more favourably. This more

favourable treatment occurs with respect to mandatory regulations which are imposed on

log producers like Merrill & Ring.

134. Of particular note is the issue of the provision of standing export exemptions for log

producers, which are known as standing green exemptions. These standing green

exemptions, and their associated standing applications, give a tremendous advantage in

treatment to those granted the ability to only harvest their trees once they know they are

able to obtain export approval. Standing exemptions are of enormous value to log

producers, since they represent an automatic bypassing of the log control regime which

enables the guaranteed export of uncut logs. There are several reasons for this:

a) Log producers with standing exemptions know ahead of time that they will

be able to export their logs, they can enter into predictable supply contracts

with their customers;

b) Standing exemptions allow logs to bypass the Surplus Testing Procedure,

log producers that have them are immune from the ever-present threats of

“blockmail” and special targeting;

c) Standing exemptions allow logs to bypass the Surplus Testing Procedure,

exempted logs will not deteriorate from infestation and exposure to the

elements as they wait for export approval; and

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d) Standing exemptions represent a guarantee to log producers that they will

be able to export their logs, they know they will be able to receive the best

market price for their logs, not the artificially suppressed BC market price.

As a result, there can be no doubt that log producers that obtain standing exemptions are

granted more favorable treatment than those who cannot obtain them.

135. Much of the damage caused to companies like Merrill & Ring occurs from the lack of

predictability and customization to customer preferences that is lost by Canada’s

mandatory requirement with respect to how logs are produced in order to obtain an export

permit. These requirements are a disguised form market subsidization to log processors

located in the province of British Columbia. These are all policy objectives which fly in

the face of the free trade objectives of the NAFTA.



to Merrill & Ring’s competitors. As a result, there can be no doubt that by denying

Merrill & Ring even the possibility of obtaining standing exemptions, Canada accords

Merrill & Ring “less favorable treatment” for the purposes of Article 1102.

137. In particular, Canada’s fails to meet its NAFTA obligations to provide national treatment

to Merrill & Ring because it fails to provide most favourable treatment under the Log

Export Control Regime with respect to:

a) The requirement to be subjected to the surplus testing prior to being

granted an exemption to export their timber;





d) The requirement to follow the additional rules for Merrill & Ring

properties located in the remote Coastal region; and

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NAFTA Article 102(1).88

For example, there are national treatment obligations for goods (Article 301), for energy (Article 602), for services89

(Article 1202) and for financial services (Article 1405).

The interpretive principle of Most Favoured Nation Treatment contained in NAFTA Article 102 would also90

strongly support a relationship between these agreements and NAFTA. So does Article 103 which specifically

addresses that relationship. This is further canvassed in the Legal Opinion of Prof. Robert Howse at paras. 9 10

Investor’s Memorial at para. 276. The preamble forms an integral part of the NAFTA and it must be given91

meaning in the interpretation of the NAFTA pursuant to NAFTA Article 102 and the Vienna Convention.

The full argument on systemic integration is set out in the Expert Legal Opinion of Robert Howse at paras. 7 11.92


is unnecessary.

2. GATT/WTO Experience is Important in Interpreting Article 1102

138. National treatment is one of three interpretative principles informing the meaning of the

entire NAFTA. National treatment is a fundamental principle supporting the NAFTA,88

which is used to fulfill its objective to liberalize trade and investment. In addition to its

use in NAFTA Article 1102, several other NAFTA provisions oblige the Parties to accord

national treatment.89

139. While appearing several times throughout the NAFTA, the term “national treatment” is

not further defined. It is a term of art. Although the obligation originated over a century

ago, the main influences on NAFTA Article 1102 are equivalent provisions in the WTO's

GATT and GATS. The relationship between the NAFTA and the GATT is expressed in90

the preamble of the NAFTA, in which the NAFTA Parties recognized that the NAFTA is

built on “their respective rights and obligations under the General Agreement on Tariffs

and Trade.” Prof. Robert Howse has described the inter-connection of sources of91

international economic law through the term "systemic integration". His points are

particularly important for an international agreement such as the NAFTA whose text and

context specifically point to other international agreements and meanings from

international law to give effect to the NAFTA's own obligations.92

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Indeed, the Pope & Talbot Tribunal described Article 12 of the GATS as “identical” to NAFTA Article 1102(2):93

Pope & Talbot, Award on the Merits of Phase 2, 10 April 2001 at para. 52, Investor’s Book of Authorities (Tab 42).

These GATT and GATS obligations are subject to WTO public policy exceptions which permit public policy94

exceptions for certain specified reasons if such measures are the least trade restrictive possible and do not constitute

an arbitrary means of discrimination (for example, see GATT Article XX), Investor’s Book of Authorities (Tab 61).

140. The NAFTA and WTO national treatment provisions are virtually identical. GATT

Article III:4 states:

The products of the territory of any contracting party imported into the territory of any other

contracting party shall be accorded treatment no less favorable than that accorded to like products

of national origin in respect of all laws, regulations and requirements affecting their internal sale,

offering for sale, purchase, transportation, distribution or use.

Similarly, Article XII of the GATS says:

... each Member shall accord to services and service suppliers of any other Member, in respect of

all measures affecting the supply of services , treatment no less favorable than it accords to its own

like services and service suppliers...

Both articles contain similar elements to those contained in NAFTA Article 1102. The93

requirement of “no less favorable” treatment is the same. Both articles limit the measures

in which they apply, albeit in different ways. Finally, NAFTA Article 1102 applies to

investors and investments in “like circumstances,” whereas the GATT and GATS articles

apply respectively to “like products” and “like services”.94

141. NAFTA Article 1102’s application to all investors and investments in like circumstances

means that it is a broader obligation than the GATT and GATS articles. In recognizing

this broader application, the UNCTAD has said:

The scope of national treatment in the investment field goes well beyond its use in trade

agreements. In particular, the reference to "products" in article III of the GATT is inadequate for

investment agreements in that it restricts national treatment to trade in goods. The activities of

foreign investors in their host countries encompass a wide array of operations, including

international trade in products, trade in components, know how and technology, local production

and distribution, the raising of finance capital and the provision of services, not to mention the

range of transactions involved in the creation and administration of a business enterprise. Hence,

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United Nations Conference on Trade and Development, National Treatment (New York: United Nations, 1999) at95

9 [Emphasis added], Respondent’s Book of Authorities (Tab 106).

United States Taxes on Petroleum and Certain Imported Substances, 17 June 1987 at para. 5.2.2., Investor’s96


Canada makes this clearly incorrect assertion at para. 322 of its Counter Memorial.97


wider categories of economic transactions may be subjected to national treatment disciplines under

investment agreements than under trade agreements.95

142. NAFTA Article 1102 also fulfills a similar purpose to its equivalent GATT and GATS

articles. The GATT US - Petroleum Panel recognized that the purpose of Article III is to

protect expectations of equality and of competitive opportunity. The Panel said the

purpose of the Article is:

to protect expectations of the contracting parties as to the competitive relationship between their

products and those of the other contracting parties[,] ... to protect current trade [and] to create the

predictability needed to plan future trade.96

143. Canada disdains any relevance of the GATT and WTO practice to give meaning to the

NAFTA. Canada cites the Methanex Tribunal in support of its proposition. Canada97

misinterprets the Methanex Tribunal’s position. That Tribunal did not say that the treaty

text and jurisprudence of the GATT could not be used to understand the purpose and

structure of NAFTA Chapter 11 in general, and Article 1102 in particular. Instead, what

the Methanex Tribunal suggested was for the purposes of determining the universe of

“investments in like circumstances” in the course of interpreting Article 1102, a tribunal

should not simply substitute the test under GATT national treatment jurisprudence of

whether there are directly competitive and substitutable products. Such a wholesale

substitution would indeed be inappropriate, since Article 1102 also applies to investors

and investments that produce services not just products.

144. Canada further cites the Occidental Tribunal to support its fanciful notion that GATT and

WTO jurisprudence is somehow of limited assistance in interpreting the national

treatment provisions of investment treaties. The Occidental Tribunal said nothing to98

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Canadian Statement of Implementation at 75, Investor’s Book of Authorities (Tab 4).99

S.D. Myers, First Partial Award, 12 November 2000 at para. 244, Investor’s Book of Authorities (Tab 39). Pope100

& Talbot, Award on the Merits of Phase 2, 10 April 2001 at para. 68 69, footnote 68, Investor’s Book of

Authorities (Tab 42). Feldman v. Mexico, Award at para. 165: “The national treatment/non discrimination provision

is a fundamental obligation of Chapter 11. The concept is not new with NAFTA. Analogous language in Article III

of the GATT has applied between Canada and the United States since 1947, and with Mexico since 1985, with

regard to trade in goods.”, Respondent’s Book of Authorities (Tab 49).

that effect. Rather, what that Tribunal did say was that the purpose of the national

treatment obligation in the GATT and WTO context is more limiting than that in the

investment treaty context, and that this difference needs to be borne in mind when

interpreting a provision such as NAFTA Article 1102.

145. Despite Canada’s attempts to denigrate the influence of the GATT and WTO practice in

the NAFTA context, Canada’s own Statement of Implementation acknowledges the

influence of the GATT/WTO on the NAFTA:

The NAFTA and the Uruguay Round agreements cover much of the same ground and the two sets

of rules are largely complementary and mutually reinforcing. In many respects, the NAFTA built

on progress that had been made in the Uruguay Round while the Round in turn profited from the

experience of Canada, the United States and Mexico in negotiating the NAFTA.99

It is clear from Canada’s own statements on the NAFTA, made in connection with the

implementation of the NAFTA, that GATT and the NAFTA negotiations were inter-

connected and inter-dependent.

146. The origins of NAFTA Article 1102 in GATT Article III, the similar wording in the

provisions, the equivalent purposes, and Canada's acknowledgement of the influence of

the WTO provisions on the NAFTA, ensures that GATT/WTO national treatment

jurisprudence informs the meaning of the three elements of NAFTA Article 1102. It is for

this reason that several NAFTA tribunals have drawn from GATT/WTO jurisprudence to

interpret the elements of NAFTA Article 1102.100

147. At the time of the negotiation of the GATT, the GATS and the NAFTA, Canada was

applying similar principles, including national treatment, to the central areas of economic

activity, including trade in goods, trade in services and national treatment to investment.

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It is clear that the principle of national treatment was well-known to Canada at this time

and that this treatment was best expressed around international trade law concepts.

148. In any event, that national treatment experience in the GATT/WTO context is relevant to

the interpretation of NAFTA Article 1102's underscored by Article 31(3)(c) of the Vienna

Convention. That provision requires that a treaty be interpreted in light of “any relevant

rules of international law applicable in the relations between the parties.” If this

provision were to be construed to permit consideration of other relevant rules of

international law in the interpretation of treaties only where those other rules were

expressed in identical language, it would be rendered largely inutile, since the only

situations in which it would apply would be ones of actual direct incorporation. In such

situations, however, Article 31(3)(c) of the Vienna Convention would be inapplicable,

since the intent of the parties to import one legal regime into another would be manifestly

clear.

149. For the foregoing reasons, there can be no doubt that this Tribunal can legitimately draw

from the GATT/WTO experience with national treatment to interpret the content and

scope of NAFTA Article 1102.

3. NAFTA Article 1102 - The Analytical Steps

150. NAFTA Article 1102(1) and (2) read as follows:

1. Each Party shall accord to investors of another Party treatment no less favorable than that it

accords, in like circumstances, to its own investors with respect to the establishment, acquisition,

expansion, management, conduct, operation and sale or other disposition of investments.

2. Each Party shall accord to investments of investors of another Party treatment no less favorable

than that it accords, in like circumstances, to its own investors with respect to the establishment,

acquisition, expansion, management, conduct, operation and sale or other disposition of

investments.

151. As is evident from the express wording of these provisions, there are three key aspects to

the national treatment obligation. First, Canada must accord foreign investors and/or

their investments treatment that is “no less favorable” than that which it accords to its

own investors and investments. Second, the differential treatment must be with respect to

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Canada’s Statement of Defence at para. 65.102


investors and/or investments “in like circumstances”. Third, the differential treatment

must be “with respect to the establishment, acquisition, expansion, management, conduct,

operation and sale or other disposition of investments.” For an investor to establish a

successful claim based on Article 1102, it must satisfy each of these three elements.

152. While NAFTA Article 1102 makes the three elements of national treatment analysis

abundantly clear, it is less clear about the order in which the analysis must proceed.

Merrill & Ring has suggested that the order should be as follows: 101

1. Determine whether the Investor and/or its investments are in “like

circumstances” to certain domestic investors and/or their investments;

2. If so, determine whether the Investor and/or its investments has been

accorded “less favorable treatment” than those investors and/or

investments; and

3. If so, determine whether the “less favorable treatment” is "with respect to

the establishment, acquisition, expansion, management, conduct, operation

and sale or other disposition of investments."

153. Canada admitted in its Statement of Defence that the first step of the analysis is to

determine whether Merrill & Ring is in “like circumstances” to certain other domestic

investors. Without explanation, Canada now advocates a different approach, arguing 102

that the analysis should proceed in the following steps: 103

1. Determine whether Canada has accorded "treatment" to Merrill & Ring

and to domestic investors;

2. If so, determine whether Merrill & Ring and said domestic investors are in

"like circumstances"; and

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3. If so, determine whether the treatment Merrill & Ring received as

compared to domestic investors in like circumstances was “less

favorable”.

Canada implicitly suggests that there should also be a fourth step to the analysis, namely

to determine whether any “less favorable treatment” accorded to Merrill & Ring was

motivated by discriminatory intent based on nationality. This obligation is not contained

in the NAFTA text, and has been explicitly rejected in GATT and WTO jurisprudence on

national treatment.

154. In its Counter-Memorial, Canada opposes the Investor's interpretation of the national

treatment obligation. It advocates a subjective and narrow construction of national

treatment replete with wide public policy exceptions not contained within the NAFTA.

This interpretation is contrary not only to NAFTA Chapter 11 jurisprudence, but also to

that of the GATT and WTO as well.

155. Canada begins by stating that NAFTA Article 1102 must be interpreted according to the

rules set out in Article 31 of the Vienna Convention. However, Canada then proceeds104

to ignore each and every one of these rules:

a) Interpretation in Good Faith in Accordance with Ordinary Meaning:

Canada picks meanings of the words "treatment" and "like circumstances"

out of thin air. It then presents these meanings to the Tribunal as if they

were self-evidently true, notwithstanding the repeated decisions of

international tribunals to the contrary.

b) Context: Canada ignores the fact that the national treatment obligation

appears throughout the NAFTA and the WTO agreements, which were

negotiated concurrently with NAFTA. It purports to distinguish the

applicability of the WTO jurisprudence on the grounds that the words "like

circumstances" have a different meaning from the WTO language of "like

goods", "like services" and "like service providers". As discussed in

Merrill & Ring’s Memorial, Canada's approach is contrary to the

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In the Matter of Cross Border Trucking Services (Secretariat File No. USA Mex 98 2008 01) Final Report of the105

Panel, February 6, 2001, Investor’s Book of Authorities (Tab 34). This is addressed at paras. 268 275 of the

Investor’s Memorial.

NAFTA Article 102(b).106


Canada’s Counter Memorial at para. 322. Indeed, the Methanex tribunal accepted that the term “like products”108

used in the GATT national treatment obligation for goods constituted a “term of art” under the Vienna Convention.

Methanex Final Award, Part IV, Chapter B at para. 29, Respondent’s Book of Authorities (Tab 85). If the “like

products” sub test is a term of art, then certainly is stands to reason that the term “national treatment” must also be

considered to be a term of art as well under the Vienna Convention.


representations of all three NAFTA Parties made to the Panel in the

NAFTA Chapter 20 state-to-state arbitration, In the Matter of Cross

Border Trucking Services.105

c) Object and Purpose: Nowhere in Canada's discussion of national

treatment is there any mention of the objects and purpose of the NAFTA,

including the objective of promoting "conditions of fair competition in the

free trade area". Canada's statement that the national treatment106

obligation only prevents nationality-based discrimination is simply not

correct. Measures can violate the national treatment obligation even if

motivated by legitimate non-discriminatory public policy purposes.107

d) Special Meaning: Canada summarily dismisses the suggestion that

national treatment is a "term of art" in international trade and investment

law. It offers no reasons for doing so, even though Merrill & Ring’s108

Memorial has demonstrated how the term was used in international treaty

practice for decades before the NAFTA was negotiated.

156. After referring to Vienna Convention principles, Canada contends that the Investor has

not identified the "treatment" at issue. This is merely another attempt to repackage

Canada's arguments that this Tribunal adopt a restrictive view of the notion of a

"measure". Treatment is merely the result of a measure relating to an investment. 109

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Investor’s Memorial at para. 94 131.110

Methanex, Final Award, Part IV, Chapter A, sections A 3 a i & A 3 a ii, Respondent’s Book of Authorities (Tab111

85).

See, for example, Methanex, Final Award, Respondent’s Book of Authorities (Tab 85). ADM Company v.112

Mexico, Investor’s Book of Authorities (Tab 131), and Feldman v. Mexico, Respondent’s Book of Authorities (Tab

49) . Also see the carefully reasoned analysis of the specific issue by Dean Ronald A. Cass in UPS v. Canada,

Investor’s Book of Authorities (Tab 14).

Merrill & Ring described the measures at great length in its Memorial, and to avoid any110

possible uncertainty has done so again in this Reply.111

157. Canada's suggested analytical approach is unprincipled and incoherent. It does not even

follow the plain wording of NAFTA Article 1102. On the one hand, Canada's approach

completely ignores the requirement to determine whether the “less favorable treatment” is

"with respect to the establishment, acquisition, expansion, management, conduct,

operation and sale or other disposition of investments." On the other hand, Canada's

approach adds steps to the analysis outside the wording of Article 1102.

158. By contrast, the framework applied by Merrill & Ring is characterized by analytical

clarity and provides a principled, commonsense approach to NAFTA Article 1102

analysis. It is practical to start off the analysis by looking to see if Merrill & Ring is in

"like circumstances" to domestic investors, since a determination that an investor or

investment is not in "like circumstances" would be quickly dispositive, leaving no need

for the Tribunal to look any further.

159. In addition, starting with the consideration of likeness immediately focuses the analysis

on what the comparator group should be. It makes little practical sense to determine

whether "less favourable treatment" has been accorded without deciding this matter first.

It is simply impossible to make a meaningful determination of "less favourable treatment"

until the comparator group by which to measure such differential treatment has already

been established. It is for this reason that most NAFTA Tribunals have made this the first

step of their NAFTA Article 1102 analyses, with the Methanex Tribunal stating that the112

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Methanex, Part IV, Chapter B at para. 29, Respondent’s Book of Authorities (Tab 85).113


"like circumstances" inquiry is the "very threshold" of the Article 1102 analysis. 113

160. Ultimately, it is abundantly clear that it makes little practical sense to first enquire as to

whether there is simply “treatment”. The existence of “treatment” flows naturally from

the existence of a “measure”. The question of whether there is a “measure” in dispute is a

question to be considered as a matter of jurisdiction. The question is not whether there

has simply been “treatment”, but rather whether the treatment is “less favorable” than that

accorded to domestic investors and/or their investments. This question properly forms

the second step of NAFTA Article 1102 analysis.

a. Step 1: “Like Circumstances” Analysis

161. The method for determining when a foreign investor is in "like circumstances" with

domestic investors for the purposes of NAFTA Article 1102 is not expressly laid out in

the NAFTA. While there has been some jurisprudence on this matter, this jurisprudence

is in disarray. As a result, this issue remains unsettled. This is reflected in the disputing

parties' vastly different positions in the context of this dispute.

162. Merrill & Ring offers a principled and practical approach to the "like circumstances"

analysis that is consistent with the express wording of NAFTA Article 1102, as well as

faithful to the objectives of the NAFTA.

i. “Like Circumstances” Requires a Comparison Between

Investors in Competition with One Another

163. Merrill & Ring has pointed out that to determine whether a foreign investor is in “like

circumstances” to a domestic investor, NAFTA Tribunals have given great weight to

whether they are in the same business or economic sector. Merrill & Ring has also114

provided evidence from the drafting history and the documents that give context to the

NAFTA, that investors are in “like circumstances” when they are in direct competition in

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the marketplace. 115

164. Although Canada admits that examining whether the foreign Investor and domestic

investors compete in the same economic sector is relevant to a determination as to

whether they are in “like circumstances”, it nonetheless suggests that it is wrong to make

this the sole focus of “like circumstances” analysis. 116

165. Canada plainly misunderstands Merrill & Ring's argument. Merrill & Ring’s position is

that whether investors are in the same business and economic sector is a strong indicator

as to whether they are in “like circumstances”. Nowhere does Merrill & Ring suggest

that this is in-and-of-itself determinative of “likeness”. Rather, what is determinative is

whether the investors are in direct competition in the marketplace. Assessing whether

investors are in direct competition with one another, in turn, requires an examination to

see if their investments generate products that are directly substitutable for one another in

the marketplace. “Likeness” analysis is commonly considered in GATT and WTO

jurisprudence. Merrill & Ring draws from a rich history of GATT law to guide its

argument.

166. Despite Canada’s apparent misapprehension of Merrill & Ring’s argument, it nonetheless

suggests that drawing from GATT law to instruct “like circumstances” analysis in the

NAFTA context is improper and impermissible. Canada asserts that NAFTA tribunals117

have “uniformly” rejected the relevance of GATT law to the interpretation of “like

circumstances” in Article 1102 although it is only able to cite Methanex, which, as we

have already pointed out, Canada misinterpreted. 118

167. Canada also neglects to mention Arbitrator Ron Cass’ analysis of similar arguments made

by Canada in the UPS case:

The most natural reading of NAFTA Article 1102…gives substantial weight to a showing of

competition between a complaining investor and an investor of the respondent Party in respect of

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UPS, Separate Statement of Dean Ronald A. Cass, May 24, 2007 at para. 17, Investor’s Book of Authorities (Tab119

14).







the matters at issue in dispute under Article 1102…A showing that there is a competitive

relationship and that two investors or investments are similar in that respect establishes a prima

facie case of like circumstances. 119

This reading clearly does not suggest that GATT law is devoid of any instructive value in

the context of NAFTA Article 1102, as Canada would have it.

168. Canada further suggests that examining the “likeness” language used in the General

Agreement on Trade in Services “GATS”, as interpreted in the NAFTA context, is also

without merit. As Merrill & Ring has made clear, the national treatment obligation in120

the GATS also uses the phrase “like circumstances”, which is not only mirrored in the

“likeness” test used in NAFTA Article 1102, but also in NAFTA Article 1202(1). As121

Merrill & Ring has explained, the Parties to the GATS have confirmed that the national

treatment obligation in the GATS is to be taken to require equality of competitive

opportunities. As Merrill & Ring has further pointed out, the Parties to the GATS are122

under a legal obligation not to enter into other agreements that offer a standard of

protection that is lower than that offered by the GATS. The GATS was negotiated123

concurrently with the NAFTA, and, as such, the protections offered in the NAFTA must

be interpreted to provide at least the same level of protection as to that offered in the

GATS a level of protection that extends to Chapter 11 of the NAFTA. 124 125

169. Canada reduces its response to Merrill & Ring’s extensive arguments to a simple

suggestion that merely because the two agreements were negotiated at the same time does

not prove that the meaning of national treatment in GATS and in NAFTA Chapter 11 are

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Occidental v. Ecuador at paras. 173, 175 and 176, Investor’s Book of Authorities (Tab 40).129

the same. . Although the two agreements were negotiated at the same time, this does not126

prove that the meaning of national treatment in GATS and NAFTA Chapter 11 are the

same. Canada has nothing further to offer. Canada does not address the impact of its127

own Public Interpretative Statement on the Implementation of the NAFTA that

acknowledges this relationship. Canada does not address the clear findings on this issue

of the NAFTA Chapter 20 Interpretative Panel decision in Cross-Border Trading. There

is one simple explanation for Canada’s inability to put forth an adequate response: it

simply cannot refute the logic of Merrill & Ring’s overall argument.

170. In its Counter-Memorial, Canada misconstrues Occidental, which it uses to suggest that

investment treaty tribunals have refused to base their determinations of “like

circumstances” on whether the investors are in the same business or economic sector. 128

In Occidental, Ecuador advanced a similar reading of the “likeness” test as does Merrill

& Ring in the present case. However, on the facts of that case, the purpose of Ecuador’s

reading was to narrow the meaning of “like circumstances.” The Tribunal in Occidental

would not accept a narrowing interpretation, since it ran counter to the objects and

purposes of the treaty in question. In explaining its decision, the Tribunal stated:

…the purpose of national treatment is to protect investors as compared to local producers, and this

cannot be done by addressing exclusively the sector in which that particular activity is

undertaken…the purpose of national treatment…is to avoid exporters being placed at a

disadvantage in foreign markets...no exporter ought to be put in a disadvantageous position as

compared to other exporters. 129

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NAFTA, Article 102(1)(a) & (b).130



On this view of national treatment, the Tribunal concluded that the foreign exporter in

that case was in fact put in a disadvantaged position compared to a domestic exporter. In

light of the objects and purposes of the treaty in question, the Tribunal then went on to

find that Ecuador had violated its duty to accord the foreign investor national treatment.

171. Applying the approach adopted by the Tribunal in Occidental to “like circumstances”

analysis to this case as Canada has suggested the Tribunal do yields a markedly

different result than Canada hopes for. As laid out in NAFTA Article 102, the objectives

of the NAFTA, “as elaborated through its principles and rules, including national

treatment”, include:

• Eliminating barriers to trade in, and facilitating the cross-border movement

of, goods and services between the territories of the Parties; and

• Promoting conditions of fair competition in the free trade area.130

Like the objectives of the treaty in Occidental, the objectives of the Treaty in the NAFTA

support a purposive interpretation of “like circumstances”. Indeed, they clearly support

the interpretation offered by Merrill & Ring, which focuses on the competitive

relationship of the investors being compared. Yet, far from being “expansive”, this

purposive interpretation is natural, reasonable and supported by the context and the

purposes of the NAFTA.

172. Nonetheless, Canada suggests that Merrill & Ring’s interpretation seeks to give a “special

meaning” to the term “like circumstances”, and that it has not adduced any evidence to131

support this “special meaning”. Again, Canada seems to have paid little attention to132

Merrill & Ring’s arguments. Merrill & Ring has performed an in-depth analysis of the

content, context and purpose of the NAFTA, and provided a detailed explanation as to

why it is that “like circumstances” analysis comes down to a determination of whether the

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Canada’s Counter Memorial at para. 298 & 302.135

investors are in a competitive relationship. In so doing, it has furnished ample133

evidence to support its interpretation.

173. Canada, on the other hand, has offered absolutely no evidence to counter Merrill &

Ring’s argument. This omission is conspicuous in light of the fact that Canada is the only

disputing Party with access to materials that would evidence its true interpretation of “like

circumstances”when it signed the NAFTA. Absent of any such evidence, and absent any

cogent response, the Tribunal should draw an appropriate inference from Canada’s

silence, and accept Merrill & Ring’s reasoned, principled, and practical interpretation of

the meaning of “like circumstances” for the purposes of NAFTA Article 1102.

ii. “Like Circumstances” Does Not Mean “Identical” or “Most

Like” Circumstances

174. In suggesting an alternative approach to “like circumstances” analysis, Canada argues that

the Tribunal should look first to see if there are investors in “identical” circumstances, 134

and, in the alternative, look for investors in the “most like” circumstances. Canada's135

suggested approach is not correct. There are several reasons for this.

175. Canada’s approach simply ignores the plain and ordinary wording of NAFTA Article

1102. This provision clearly states that foreign investors are to be accorded “treatment no

less favorable” than domestic investors “in like circumstances”. Had the drafters of the

NAFTA intended national treatment in NAFTA Article 1102 to protect only foreign

investors or investments in "identical" or "most like" circumstances, they would have said

so.

176. This ordinary reading is supported by the overall context in which the words “like

circumstances” in NAFTA Article 1102 appear. NAFTA Article 1102 affords protection

“with respect to the establishment, acquisition, expansion, management, conduct,

operation and sale or other disposition of investments.” From the broad circumstances of

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NAFTA, Article 102(1)(a) & (b)136

the application of this national treatment obligation, it is clear that the protections of

NAFTA Article 1102 are meant to be extended to foreign investors from host government

measures that adversely impact them. This suggests that the protections of NAFTA

Article 1102 were meant to be broad indeed. Restricting these protections by reading in a

highly restrictive meaning to “like circumstances” where “like” really means “identical”

or the “most like” certainly must run counter to the specific context of the entire

obligation as worded in NAFTA Article 1102.

177. Canada’s approach is not supported by the objectives of the NAFTA. As already stated,

these objectives include:



• Promoting conditions of fair competition in the free trade area. 136

In contrast to these objectives, Canada offers a highly restrictive interpretation of NAFTA

Article 1102 that would greatly reduce the protection it is meant to provide foreign

investors.

178. Canada’s approach would lead to ambiguous, absurd and unreasonable results. Unlike

Merrill & Ring’s interpretation, Canada’s approach does nothing to clarify what investors

or investments are to be compared to. Canada’s approach provides no guidance as to what

“identical” or “most like” investors actually means. In addition, following Canada’s

approach would lead to absurd results. For example, assume that there are two potential

domestic investors by which to compare the treatment accorded to the foreign investor.

Assume further that the first candidate is somehow deemed to be “more like” the foreign

investor than the second candidate, even though both are clearly in the same business and

economic sector as the investor, as well as in a directly competitive relationship. Under

Canada’s approach, NAFTA Article 1102 would offer the foreign investor no protection

if the first domestic investor received the same treatment, even though the second

domestic investor clearly received more favorable treatment. Such a result would be

inconsistent with the underlying principle of national treatment, and would be capable of

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undermining the fundamental free trade purposes of the NAFTA. By consequence,

Canada’s suggested approach cannot be correct.

179. In trying to advance its argument, Canada also misreads the Methanex Tribunal’s

decision. In Methanex, the Tribunal based its determination that the claimant and137

domestic producers of ethanol were not in “like circumstances” on considerations of the

directness or closeness of the competitive relationship. The Tribunal held that where

possible, the foreign investor should be compared to a domestic investor in the identical

product market, not some related, but different market. Since on the facts of that case

there were investors in that identical product market namely, the MTBE market the

Tribunal rejected the claimant’s argument that it should be compared with producers in a

different product market namely, the ethanol market. This approach implies the

proposition that where the competitive relationship between investors is defined in terms

of product competition, the “likeness” inquiry should be directed towards establishing

whether there are domestic investors engaged in producing identical products. That is,

the Methanex Tribunal’s approach is ultimately one that actually supports a focus on the

competitive relationship in the inquiry into “likeness”. Incidentally, this is precisely the

relationship between all of the Investor’s proposed comparators in the present case, all of

which produce logs.

180. Given the fact that Canada’s interpretation so clearly runs counter to not only the express

wording of NAFTA Article 1102, but also to the objects and purposes of the NAFTA, it

is clear that Canada seeks to introduce a “special meaning” to the term “like

circumstances”. Under Article 31(4) of the Vienna Convention, such a “special meaning”

may only be applied where the party advancing it can demonstrate that it reflects the

intention of the Parties. Canada has provided no such evidence.

181. Regardless of its incompatibility with the plain wording of NAFTA Article 1102, as well

as the objectives of the NAFTA, on its face, Canada’s approach makes no sense. It is

futile to look for investors in “identical” circumstances. As Arbitrator Cass noted in his

careful consideration of this NAFTA obligation in the UPS case:

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UPS v. Canada, Separate Statement of Dean Ronald A. Cass at para. 14. Investor’s Book of Authorities (Tab 14).138


Canada’s Counter Memorial at paras. 305 & 306.140

NAFTA does not require the sort of near identity of circumstances urged by Canada, a test that if

adopted would substantially undermine the efficacy of Article 1102. Canada’s approach would

require an excessively close fit between the complaining investor or investment and the compared

domestic investment. National treatment protection would be dramatically reduced under that

approach, as it would eliminate any right to protection whenever there were differences between

the complaining party and the compared investment or investor even if those differences were

slight enough not to affect the competitive relationship that Article 1102 was designed to protect.138

The majority in UPS said nothing to the contrary.

182. Even identical twins have differences between them. No two investors are ever in

identical circumstances; there are always an infinite number of ways to differentiate one

from the other. Moreover, there is no practical way to delineate how investors are “more

like” than others. Adapting Canada’s proposed “identical twin” test would only create

greater uncertainty to investors and to governments. Merrill & Ring’s interpretation of

“like circumstances” analysis is eminently practical and supported by the context of the

treaty and the jurisprudence. This interpretation places appropriate boundaries on

language that, on its own terms, provides little guidance as to what should be considered

“like”, and, conversely, what should be considered “unlike”. Focussing NAFTA Article

1102 analysis on the competitive relationship between investors is not only consistent

with the context and purposes of the NAFTA, but it also provides a principled approach

to provide much needed clarity both to investors and governments alike.

iii. “Like Circumstances” Analysis Should Not Factor In

Policy Objectives

183. Canada further suggests that policy objectives are a relevant factor for the purposes of

“like circumstances” analysis. Again, Canada’s position is not supportable.139

184. To buttress its position, Canada points to one OECD publication, as well as one

UNCTAD study that refers to the very same OECD publication. Canada exaggerates140

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Declaration, National Treatment for Foreign Controlled Enterprises, OECD: 1993 at 22, Respondent’s Book of141


Barry Appleton, NAFTA Legal Text and Interpretive Materials, (West Publishing, 2007). The relevant negotiating142

texts are set out in Volume 3. The very first draft of the NAFTA dating from December 1, 1991 contains a National

Treatment obligation for investment to receive “treatment no less favourable than that granted in like circumstances”

in draft Article 2102, Investor’s Book of Authorities (Tab 132).

the support that this publication provides for its position; far from endorsing Canada’s

view, this publication merely states that policy objectives “could” be taken into

consideration in “like circumstances” analysis not that policy objectives “must” or even

“should” be taken into consideration. Canada also fails to mention that this OECD141

publication is from 1993 more than a year after these obligations were already drafted.

The NAFTA’s negotiating history shows that in 1992 the “like circumstances” language

had been used for national treatment in investment. Since the provisions of any treaty142

provision must be interpreted according to its plain and ordinary meaning, and in light of

the treaty’s object and purpose, this publication has little if any relevance to the NAFTA.

185. Similar to Canada’s suggestion that “like circumstances” actually means “identical” or

“most like” circumstances, its submission that non-specified public policy objectives are

a relevant consideration to “like circumstances” analysis runs counter to the express

wording of NAFTA Article 1102 itself. Nowhere in NAFTA Article 1102 did the Parties

make any suggestion that the national treatment obligation is conditioned by the policy

objectives of the host state. Had that been the intention, the Parties could have easily

achieved this result, for example with the following wording:

Each Party shall accord to investors of another Party treatment no less favorable than that it

accords, in like circumstances, to its own investors with respect to the establishment, acquisition,

expansion, management, conduct, operation and sale or other disposition of investments, provided

that such treatment does not run counter to the legitimate policy objectives of that Party.

Yet despite the ease with which this condition could have been included as part of Article

1102, the Parties clearly chose to leave it out.

186. Indeed, the NAFTA Parties clearly decided against allowing broad categories of public

policy exceptions from applying to the NAFTA Investment Chapter’s obligations. The

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Reservation at II C 3 and II C 5, Investor’s Book of Authorities (Tab 133).143

Reservation at II C 7, Investor’s Book of Authorities (Tab 133).144





NAFTA Parties knew how to make such exceptions. Such broad exemptions are

contained in GATT Chapter XX and were specifically applied to other parts of the

NAFTA through the NAFTA’s Exemptions in NAFTA Chapter 21. They specifically do

not apply to the Investment or Services Chapters in the NAFTA.

187. Instead, the NAFTA drafters applied a different mechanism to allow public policies to be

exempted. NAFTA Article 1102 is already subject to exceptions permitted by NAFTA

Article 1108. Because the NAFTA Parties rejected general public policy exceptions for

the Investment Chapter in the NAFTA, they created specific listed exemptions. The

Parties were also able to express reservations to be filed in their respective Schedules to

Annexes I and II of the NAFTA. Canada made numerous reservations to the application

of NAFTA Article 1102 to sectors of its economy, each of which was based on an

underlying policy rationale. For example, Canada reserved whole swathes of its economy

from the future application of NAFTA Article 1102, including the following sectors:

• Telecommunications;143

• Government finance;144

• Minority affairs;145

• Social services;146

• Air transportation; and147

• Water transportation.148

There are many other reservations taken by Canada and by other NAFTA Parties.

Conspicuously absent from this list is any mention of the forestry or lumber processing

sectors.

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188. It is therefore clear that the Parties turned their minds to the need to reserve various

economic sectors from the application of NAFTA Article 1102. It is equally clear that

Canada made able use of its ability to do so. These reservations are all fundamentally

predicated on Canada’s desire to pursue particular social and economic policies but were

subject to negotiation with all the NAFTA parties. By excluding the forestry and lumber

processing sectors from its list of reservations, Canada implicitly accepted that NAFTA

Article 1102 would apply to investments in the forestry and lumber sector. Thus, to

introduce a new unwritten public policy exception into the “likeness” analysis runs

counter to the express wording of NAFTA Article 1102, and is inconsistent with the clear

intention of the Parties at the time they negotiated and signed the NAFTA.

189. This commonsense reading is also supported by the overall wording of NAFTA Article

1102, which evinces a context that supports an expansive not a restrictive

interpretation of national treatment protections. NAFTA Article 1102 affords protection

“with respect to the establishment, acquisition, expansion, management, conduct,

operation and sale or other disposition of investments.” This demonstrates that the

drafters intended the protections of NAFTA Article 1102 to protect foreign investors

from measures that have almost any sort of negative impact on them. The protections of

NAFTA Article 1102 were always meant to be broad. Restricting these protections by

reading in an unbridled new policy exception runs counter to this intention, as evinced in

the context of the overall wording of NAFTA Article 1102.

190. That policy considerations do not properly belong in “like circumstances” analysis is

further evidenced by the fact that such an approach would run counter to the objectives of

the NAFTA itself. These objectives include:




NAFTA Article 102 expressly calls for national treatment to be interpreted in accordance

with these objectives. Nowhere does NAFTA Article 102 say that national treatment is to

be interpreted in accordance with policy considerations. Room for such considerations

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ILC Article 32 provides that a state may not rely on the provisions of its own internal law as justification for its150

failure to comply with its obligations, Investor’s Book of Authorities (Tab 130). This obligation is also set out in

Article 27 of the Vienna Convention of the Law of Treaties, Investor’s Book of Authorities (Tab 41).


for Chapter 11 obligations was amply provided for in NAFTA Article 1108 exceptions

and in the reservations made in the Parties’ respective Schedules to Annexes I and II.

191. Allowing policy objectives to play a role in “like circumstances” analysis would further

lead to absurd or unreasonable results. This is for the simple reason that doing so would

allow Canada to rely upon its own policies to absolve it of liability arising from those

very same policies. Generally, international law does not accept “self-judging” of

justifications for nullification or impairment of benefits set out in a treaty. Furthermore,

the ILC Articles do not permit Canada to rely on municipal law obligations to justify

failure to comply with its international law obligations. Canada’s wish to have the150

Tribunal sanction this absurd result can be seen in its response on the issue of log scaling.

According to Canada, Merrill & Ring is in “like circumstances” to all other BC log

producers, since they are all subject to the same scaling requirements. It is clear that151

for Canada, what places two investors in “like circumstances” is actually the way in

which Canada treats them. If Canada treats them the same, then they are in “like

circumstances.” If Canada treats them differently, then they are not in “like

circumstances.” This approach improperly conflates the “likeness” analysis with

“treatment” analysis, and conveniently creates a test whereby Canada could never be in

violation of NAFTA Article 1102. On the one hand, any differential treatment would

render the investors “unlike”, and, on the other hand, any investors in “like

circumstances” could not possibly be subject to differential treatment. This would lead to

the absurd result of allowing a mistaken and discriminatory policy to absolve Canada of

liability for that very same policy. The end result would be to deprive NAFTA Article

1102 of any meaning whatsoever.

192. Given the fact that Canada’s suggested inclusion of a policy exception to NAFTA Article

1102 so clearly runs counter to not only the express wording of Article 1102, but also the

objects and purposes of the NAFTA, it is clear that what Canada seeks to do is to

introduce a “special meaning” to the term “like circumstances”. As mentioned, under

Article 31(4) of the Vienna Convention, such a “special meaning” may only be applied

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Canada’s Counter Memorial at paras. 325.153

Canada’s Counter Memorial at paras. 312.154

where the party advancing it can demonstrate that it reflects the intention of the Parties.

Unlike Merrill & Ring, Canada has access to the whole travaux préparatoires and

drafting history of the NAFTA yet it has provided no such evidence in support of the

“special meaning” for “like circumstances” it proposes.

193. Nonetheless, Canada rightly points out that to date three Tribunals have in fact considered

Respondent States’ policy objectives in the course of their “like circumstances”

analyses. For all the foregoing reasons, however, we respectfully submit that these152

Tribunals were wrong to do so. Neither the wording of Article 1102, nor the objects and

purposes of the NAFTA suggest that this approach is appropriate or consistent with the

treaty.

194. In the end, it is important to remember that Canada itself has already asserted that

“Article 1102…must be applied as drafted by the NAFTA Parties”, and that “like153

circumstances” “means what it says”. If Canada is to be taken at its word, then this154

Tribunal must not sanction an approach to “like circumstances” analysis that reads new

words into NAFTA Article 1102 words that were clearly and consciously omitted by

the Parties. Such a reading of NAFTA Article 1102 would not only run counter to the

plain wording of the provision, but would also run counter to the objectives of the

NAFTA. Indeed, it would lead to unjustifiable and absurd results. This Tribunal should

not let that happen.

b. Step 2: "Treatment No Less Favorable”

195. The second step of the NAFTA Article 1102 analysis is the obligation to accord a foreign

Investor and its investments with “treatment no less favorable” than that provided to

domestic investors in like circumstances.

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i. “Treatment No Less Favorable” Means Equality of

Competitive Opportunities

196. Merrill & Ring has argued that Canada’s obligation to provide “no less favorable

treatment” to foreign Investors as compared to domestic investors amounts to an

obligation to provide the investors with equality of competitive opportunities. As155

mentioned, Merrill & Ring’s argument is based on a detailed review of the negotiating

history of the NAFTA together with the GATS, a careful look at the NAFTA text,

including the interrelationship between the various NAFTA chapters, and the findings of

previous NAFTA tribunals. 156

197. Nonetheless, Canada refutes this argument, and suggests that “treatment no less

favorable” cannot be taken to require it to provide foreign investors with equality of

competitive opportunities. Canada provides no reasoned argument in support of its157

position. Instead, and in stark contrast to Merrill & Ring’s well documented arguments,

it merely suggests that it is unreasonable to draw from the rich history of GATT law to

inform an interpretation of NAFTA Article 1102. It would seem that Canada would158

have the Tribunal believe that the NAFTA was negotiated in a vacuum, and, as such, that

the rich history of GATT law which obviously formed an important backdrop to the

NAFTA is of absolutely no value in any effort to interpret the provisions of the

NAFTA. Canada would also have us ignore the textual context in the NAFTA discussing

how the national treatment principle includes equality of competitive opportunities.

Canada’s argument is not only unsupported and undeveloped, but is on its face, plainly

unreasonable.

198. By contrast, it is entirely reasonable to interpret “treatment no less favorable” to mean

treatment that accords investors equality of competitive opportunities. This interpretation

is clearly supported by the plain and ordinary meaning of the phrase “treatment no less

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NAFTA, Article 1102(3). [emphasis added]161

favorable.” That is, if a domestic investor receives one type of favorable treatment, a

foreign investor should receive “treatment no less favorable” than that plain and simple.

This, in turn, dovetails nicely with the vision of "like circumstances" offered by Merrill &

Ring. Merrill & Ring hold that where the domestic investor and foreign investor are in a

directly competitive relationship and therefore in “like circumstances,” an interpretation

of “treatment no less favorable” to mean equality of competitive opportunities makes

perfect sense. A holistic and coherent approach to NAFTA Article 1102 analysis begins

to take form.

ii. “Treatment No Less Favorable” Means “Best” Treatment

199. Merrill & Ring has argued that Canada’s obligation to provide it with “treatment no less

favorable” requires that Canada accord it treatment that is the same as the best treatment

received by domestic investors that are in direct competition with Merrill & Ring in the

marketplace. This is not only supported by the jurisprudence already highlighted by159

Merrill & Ring, but also by the plain wording of NAFTA Article 1102(3) itself:160

The treatment accorded by a Party under paragraphs 1 and 2 means, with respect to a state or

province, treatment no less favorable than the most favorable treatment accorded, in like

circumstances, by that state or province to investors, and to investments of investors, of the Party

of which it forms a part. 161

200. As the Tribunal in Pope & Talbot noted, while this obligation on its face applies only to

the actions of states and provinces, it actually provides the interpretive basis for the

conclusion that the national governments are also required to accord the best treatment to

foreign investors and their investments under NAFTA Articles 1102(1) & (2). In the

words of that Tribunal:

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Pope & Talbot, Award on the Merit of Phase 2, April 10, 2001 at paras. 39 42. Investor’s Book of Authorities162

(Tab 42).



…like states and provinces, national governments cannot comply with NAFTA by according

foreign investments less than the most favorable treatment they accord their own investors. 162

201. Canada has responded to Merrill & Ring’s arguments by asserting that the issue is

irrelevant, since, based on the facts, it claims to treat all investors “in exactly the same

fashion.” Canada is mistaken. While this shall be made abundantly clear once we163

consult the facts, it is clear that Canada has not disputed its legal obligation under

NAFTA Article 1102 to provide foreign investors with the best treatment received by

domestic investors in like circumstances.

iii. “Less Favorable Treatment” Does not Require

Discriminatory Intent

202. Canada seeks to introduce a fourth element to NAFTA Article 1102 analysis, namely, that

any “less favorable” treatment accorded to foreign investors in like circumstances to

domestic investors must be motivated by discriminatory intent based on nationality. 164

This is what Canada calls NAFTA Article 1102's “overriding purpose”. Neither the plain

wording, nor the context of NAFTA Article 1102, evince any such requirement or

purpose.

203. It is plain on its face that NAFTA Article 1102 is not worded so as only to protect foreign

investors from discriminatory treatment based upon- and motivated by their foreign

nationality. Had the Parties so intended, they could have easily drafted NAFTA Article

1102 differently. For example, if this were in fact the intention of the Parties, we might

expect Article 1102 to contain a provision such as the following:

For the purposes of subsections 1 3, a Party may accord to investors of another Party, and to

investments of investors of another Party, treatment less favorable than that it accords, in like

circumstances, to its own investors with respect to the establishment, acquisition, expansion,

management, conduct, operation and sale or other disposition of investments, provided that such

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less favorable treatment is not motivated by discriminatory intent based on the nationality of the

investor of the other Party.

NAFTA Article 1102 contains no such wording, nor does any such language appear

anywhere else in the NAFTA.

204. That “less favorable treatment” need not be motivated by discriminatory intent based on

nationality is not only supported by a plain reading of the term, it is also buttressed by the

overall wording of NAFTA Article 1102, which provides a context that supports an

expansive not a restrictive interpretation of national treatment protections. NAFTA

Article 1102 grants protection “with respect to the establishment, acquisition, expansion,

management, conduct, operation and sale or other disposition of investments.” Thus, it is

obvious that the drafters had in mind a vision of NAFTA Article 1102 that protects

foreign investors from any sort of differential and adverse government interference. This

shows that Article 1102 was always meant to afford broad protection. Curtailing that

protection by reading in a requirement that “treatment” may only be considered to be

“less favorable” if it is motivated by discriminatory intent based on nationality flies in the

face of that intention.

205. The addition of this novel fourth element to NAFTA Article 1102 analysis also runs

counter to the objectives of the NAFTA. As mentioned, these objectives include:




Restricting the protections of NAFTA Article 1102 only to discriminatory treatment

motivated by the nationality of the foreign investor does nothing to further these

objectives. On the contrary, it runs counter to these objectives, since it would allow for

trade barriers and unfair conditions of competition provided that these were not

specifically motivated by discriminatory intent based on nationality. Indeed, this would

amount to nothing short of an absurd result, since a NAFTA Party would be absolved of

liability for taking measures that while perhaps not de jure discriminatory are

discriminatory on a de facto basis.

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International Thunderbird Gaming Corporation, para. 177, Respondent’s Book of Authorities (Tab 136).168

Occidental v. Ecuador at para. 177, Investor’s Book of Authorities (Tab 40).169

206. Contrary to what Canada asserts, the jurisprudence does not confirm that the protections

of the national treatment provision are so restricted. Canada misconstrues the

jurisprudence on this matter.

207. For example, Canada relies on Feldman as supporting its position. What Canada166

neglects to mention, however, is that the Feldman Tribunal only suggested that the

question of nationality-based discrimination is an “interpretive hurdle” in the general

context of Article 1102. In dealing with this question more concretely, it concluded that:

…it is not self evident, as the Respondent argues, that any departure from national treatment must

be…shown to be a result of the investor’s nationality. There is no such language in Article

1102. 167

208. This view was confirmed by the Tribunal in Thunderbird, which stated:

It is not expected from Thunderbird that it show…that the less favourable treatment was motivated

because of nationality. The text of Article 1102 of the NAFTA does not require such a showing.168

209. These findings have been echoed in the non-NAFTA context as well. In Occidental, in

examining the requirements of a similarly worded national treatment provision, the

Tribunal found that the Claimant had received less favourable treatment than that

accorded to investors of the Respondent State. In reaching its conclusion, the Tribunal

held that Ecuador had taken measures in breach of its national treatment obligation even

though the Tribunal was “convinced that this has not been done with the intent of

discriminating against foreign-owned companies.” 169

210. Rejecting the notion that NAFTA Article 1102 offers foreign investors protection only

from overt discrimination that is, discrimination an Investor could actually prove was

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UPS v. Canada, Separate Opinion of Dean Ronald A. Cass at para. 58, Investor’s Book of Authorities (Tab 14).170

UPS v. Canada, Separate Opinion of Dean Ronald A. Cass at para. 59, Investor’s Book of Authorities (Tab 14).171


motivated by discriminatory intent based on nationality Arbitrator Cass, in his Separate

Opinion in UPS, held that such an interpretation of NAFTA Article 1102 “would be of

little value to investors.” Professor Cass then went on to say that the requirements of170

Article 1102 “plainly extend beyond formal parity” and instead “commands an effective

parity of foreign and domestic investors and investments.” The Majority Decision in171

UPS said nothing to the contrary.

211. The fact that the jurisprudence does not support Canada’s position also reflects a deeper

understanding by tribunals that this position does not fit with the overall architecture of

the NAFTA. Specifically, if NAFTA Article 1102 were to be reduced to an obligation

not to treat foreign investors less favourably only on the basis of nationality, this

provision would become redundant. This is because such an obligation already exists

under the customary international law standard of “fair and equitable treatment”. It is

clear that Article 1102 is not worded so as to be a simple affirmation of customary

international law with respect to discrimination towards aliens. That obligation is

properly found in NAFTA Article 1105 not Article 1102.

212. In addition, there are also good policy reasons that Article 1102 ought not be restricted in

the way Canada suggests. As the Tribunal in Feldman noted:

… requiring a foreign investor to prove that discrimination is based on his nationality could be an

insurmountable burden to the Claimant, as that information may only be available to the

government. It would be virtually impossible for any claimant to meet the burden of

demonstrating that a government’s motivation for discrimination is nationality rather than some

other reason. 172

213. In the end, the protections of NAFTA Article 1102 are not limited to state actions that are

motivated by discriminatory intent based on the nationality of the foreign investor. Such

a reading is not only contrary to the plain wording of NAFTA Article 1102, but also runs

counter to the objects and purposes, as well as the architecture of the NAFTA. In

addition to the good policy grounds for refusing such an interpretation, it is for these

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Schaaf Witness Statement, February 12, 2008 at para. 9.174

reasons that NAFTA tribunals have rightly refused to interpret Article NAFTA 1102 in

this way.

c. Step 3: “With Respect to the Establishment, Acquisition,

Expansion, Management, Conduct, Operation, and Sale or Other

Disposition of Investments”

214. Once a tribunal has disposed of the questions relating first to “like circumstances”, and

next to “less favorable treatment”, then, consistent with the plain wording of NAFTA

Article 1102, it must then ensure that the treatment in question is “with respect to the

establishment, acquisition, expansion, management, conduct, operation, and sale or other

disposition of investments.” As Merrill & Ring has noted, this is a very broad aspect of

the provision that seemingly encompasses almost any measure reasonably connected with

the investment. 173

4. Merrill & Ring is in “Like Circumstances” to Domestic Investors

215. Using this principled and pragmatic vision of NAFTA Article 1102 analysis as a

compass, we shall now demonstrate that, on the facts of this case, Canada has violated its

national treatment obligations. The first step, of course, is to demonstrate that Merrill &

Ring is in "like circumstances" to domestic investors. The facts clearly demonstrate that

this is the case.

a. Merrill & Ring Is in “Like Circumstances” with Log Producers in

the BC Interior and Alberta

216. Merrill & Ring’s operations are located exclusively on the BC South-Coast. The trees174

Merrill & Ring grows are of various species, including hemlock, balsam, Douglas-fir, red

cedar, yellow cedar, spruce, alder, maple, lodgepole pine, white pine, paper birch, and

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Branter Witness Statement, December 9, 2008 at para. 4; See also176

Ruffle Expert Report, December 11, 2008 at para. 4.6.4.177

Ruffle Expert Report, at para. 4.6.4.178


Branter Witness Statement, December 9, 2008 at180

para. 4.

181

182

183

cottonwood. Log producers in both the BC Interior and Alberta grow many of these175

same species.176

217. Many log producers on the BC South-Coast harvest old-growth trees. Old-growth trees177

have characteristics that make them very different from second-growth trees, and the two

may have different end-uses. Merrill & Ring, however, harvests only second-growth178

trees. Log producers in both the BC Interior and Alberta also harvest logs that are179

primarily second-growth, although old growth is also harvested in the BC Interior. 180 181

This means that the logs Merrill & Ring grows, and the logs grown by producers in the

BC Interior and Alberta have the same end-uses, with most of them destined for

processing in sawmills and pulpmills. group of

lumber mills. explains in his witness statement, this is why he has used

Merrill & Ring logs and logs from the BC Interior and Alberta interchangeably in his

sawmills.182

218. There is one particular area in the BC Interior known as the “wet belt” that provides a

perfect example of the interchangeability of Merrill & Ring’s logs with logs produced in

the BC Interior. The wet belt is located in the Kootenay region of BC, very near the

Canada-US border. The growing conditions in the wet belt are very similar to those on183

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184


186

187

Schaaf Reply Witness Statement, December 12, 2008 at para 4; 188

. Indeed, Canada confirms that insofar as log scaling is concerned, Merrill & Ring is in “like

circumstances” with all other log producers in BC. See Canada’s Counter Memorial at para. 385.

189

190

the BC South-Coast. As a result, log producers in the wet belt grow trees of the same184

species and grades as the trees grown by log producers on the BC South-Coast, including

Merrill & Ring. Trees grown in the wet belt have the exact same end-use as trees185

grown on the BC South-Coast; they are either sold to domestic log processors, or else

they are exported to log processors in the US. These logs are directly substitutable for186

one another in the market.

219. The substitutability of Merrill & Ring’s logs with those of log producers in the BC

Interior is further evidenced by the fact that they are placed up for sale on the very same

Bi-Weekly List, with log purchasers comparing them one against the other when making

offers on the logs that are listed.

220. Just like Merrill & Ring, log producers in the BC Interior set harvest plans to organize

their operations ahead of time. Just like Merrill & Ring, log producers in the BC Interior

are subject to “blockmailing” and special targeting. Just like Merrill & Ring, log187

producers in the BC Interior have to scale their logs according to the metric system.188

Just like Merrill & Ring, log producers in the BC Interior cannot enter into long-term

supply contracts with US purchasers as a result of the Log Export Control Regime. 189

Just like Merrill & Ring’s logs, logs in the BC Interior are subject to damage as they wait

to clear the Surplus Testing Procedure and gain export approval. And just like Merrill190

& Ring, log producers in the BC Interior export their logs to the US if they can eventually

obtain an export permit from Canada under the Surplus Testing Procedure. Of course,

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Branter Expert Statement, December 9, 2008 at paras. 5 & 6.191



log producers in Alberta do not face these difficulties since they are not subject to any of

the restrictions of the Log Export Control Regime.191

221. As Merrill & Ring has pointed out, log sorting requirements on the BC Coast are different

than sorting requirements in the BC Interior and Alberta. Canada has responded by192

alleging that this difference is due to the simple fact that “normal market sorting

practices” in these areas differ. What Canada is trying to do is to portray the193

differences in sorting requirements as something natural and immutable. Canada has it

backwards: these differences are not the result of any natural or immutable force; they are

the result of the Log Export Control Regime itself, which requires log producers in these

different regions to sort their logs differently. These differences do not render Merrill &

Ring “unlike” log producers in the Interior or Alberta, since these differences are the

result of governmental not natural forces.

222. For all these reasons, Merrill & Ring and its investments are in “like circumstances” to

log producers and their logs in the BC Interior and in Alberta.

b. Merrill & Ring Is in "Like Circumstances" with Log Producers on

the BC Coast

223. For similar reasons, Merrill & Ring is a fortiori in “like circumstances” to log producers

on the BC Coast, whether they are located on the South-Coast or not.

224. The trees Merrill & Ring grows are of exactly the same species and grades as other log

producers on the BC Coast. There is no difference between the logs Merrill & Ring

produces and the logs domestic investors produce on the BC Coast.

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194

195

196

197

198

225. Just like logs produced on the BC South-Coast, logs produced on the entire BC Coast

have exactly the same end-use in the market. Logs from the BC South-Coast appear on194

the same Bi-Weekly List as logs from other parts of the Coast. The logs are completely

interchangeable. Log processors will simply purchase the logs they need at the best price

they can.

226. Just like Merrill & Ring, log producers from other parts of the BC Coast set harvest plans

to organize their operations ahead of time. Just like Merrill & Ring, log producers from

other parts of the BC Coast are subject to “blockmailing” and special targeting. Just195

like Merrill & Ring, log producers from other parts of the BC Coast have to scale their

logs according to the metric system and sort them in accordance with the Coastal End

Use Sort Descriptions. Just like Merrill & Ring, log producers from other parts of the196

BC Coast cannot enter into long-term supply contracts with US purchasers as a result of

the Log Export Control Regime. Just like Merrill & Ring's logs, logs from other parts197

of the BC Coast are subject to damage as they wait to clear the Surplus Testing Procedure

and gain export approval. And just like Merrill & Ring, log producers from other parts198

of the BC Coast gladly export their logs to the US and Asia if they can eventually clear

the Surplus Testing Procedure.

227. For all these reasons, Merrill & Ring and its investments are in “like circumstances” to

log producers and their logs from other areas of the BC Coast.

c. Policy Rationale Does Not Render Merrill & Ring "Unlike"

Domestic Investors in Alberta, the BC Interior, or the BC Coast

228. A basic element of Canada’s “like circumstances” argument is that the rationale

underlying a number of its policies somehow leads to the conclusion that Merrill & Ring

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Canada’s Counter Memorial at para. 358; Notice 102, section 1.2, Investor’s Schedule of Documents (Tab 22).200

This is why Canada was unable to produce any documents in response to Merrill & Ring’s Document Request201

#10, Investor’s Schedule of Documents (Tab 83), which requested “[d]ocuments evidencing any shortage of logs

anywhere in Canada related to (a) the needs of national defence; or (b) log supplies for domestic sawmills.”


is not in “like circumstances” to other log producers. This is falsely premised on the

notion that Canada’s own discriminatory policies can serve to absolve it of liability for

those very same policies. Canada makes this argument in four specific contexts.

229. First, Canada argues that “BC is in entirely unlike circumstances from all other provinces

with respect to the need for, and application of, Notice 102.” On this point it is evident199

that Canada is fundamentally confused about how to approach “like circumstances”

analysis. The thrust of Canada’s argument seems to be that BC is “unlike” other

provinces. However, this is totally beside the point. The issue is whether Merrill & Ring

is in “like circumstances” to domestic investors. Whether or not BC is “like” or “unlike”

other provinces is entirely irrelevant for the purposes of Article 1102.

230. Canada implies that since Notice 102 is crafted for the logging industry in BC, there is a

rational connection between this measure and its stated purpose, thereby placing Merrill

& Ring in “unlike circumstances” to log producers in other provinces. Even assuming

that there was some logical coherence to this argument, it would not actually work in the

context of this case. As Canada has rightly pointed out, the stated purpose of Notice 102

is:

…to ensure that there is an adequate supply and distribution of [logs] in Canada for defence and

other needs. 200

Canada admitted in the document production process, that it has no documents of any

kind to suggest that there has ever been any shortage of logs anywhere in Canada related

to either the needs of national defence or of domestic sawmills. In fact, we know that201

in recent years the problem in BC has been to generate enough processing capacity to deal

with wood created as a result of an infestation of Mountain pine beetle. This is partly202

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Canada’s former Royal Commissioner, Professor Peter Pearse, concluded that the Log Export Control Regime204

could not be a plausible policy connected to addressing the adequacy of domestic timber supply in paras. 23 26 of

his Witness Statement filed in this arbitration dated February 6, 2008.




Notice 102, section 1.5, Investor’s Schedule of Documents (Tab 22).208



why log production has fallen well short of the annual allowable cut in every part of the

province in recent years. In short, the problem is not on the supply side it is on the203

demand side.204

231. The second context in which Canada seeks to rely on its own policies to excuse it from

liability under NAFTA Article 1102 for those very same policies relates to the issue of

differential sorting requirements on the BC Coast as compared to the BC Interior. For

Canada, the fact that it forces Merrill & Ring to sort its logs differently than log producers

in the BC Interior means that Merrill & Ring is not in “like circumstances” to those log

producers. Canada suggests that the different sorting requirements it imposes on log205

producers on the BC Coast as compared to the BC Interior are merely a reflection of

“normal market practices” that they are “industry driven and not a government206

initiative.” This is plainly false. Notice 102 itself imposes the requirement that logs207

be sorted in booms comprised of “not less than 90% of a single species.” Notice 102 is208

a government initiative, not “industry driven”. In any event, in explaining the rationale

behind these sorting requirements, Canada lays bare just what it means by “industry

driven”. Canada’s “rationale” is made clear when it explains that the differential sorting

requirements on the BC Coast exist because “[m]ills require preferred log dimensions.” 209

In other words, when Canada states that this policy is “industry driven”, what it really

means is that it caters to the domestic preferences of local B.C. log processors. These

local preferences are different from preferences in other markets. This, however,210

comes at the expense of log producers like Merrill & Ring.

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Canada’s Counter Memorial, para. 369.212


Peter Pearse Expert Report, February 6, 2008 at para. 23.214

232. The third example where Canada seeks to rely on its own policies to excuse it from

liability under NAFTA Article 1102 for those very same policies can be seen in its

explanation for allowing log producers in the BC Interior to advertise standing timber,

while preventing log producers on the BC Coast from doing the same. According to

Canada, the fact that it can offer a policy rationale for this differential treatment means

that Merrill & Ring is not “in like circumstances” to log producers in the BC Interior. 211

Again, Canada attempts to frame the issue to suggest that the difference in treatment is a

reflection of “normal market practices”. And again, Canada has it backwards. The

difference in treatment is not a result of “normal market practices”; rather, these so-called

“normal market practices” are a result of the difference in treatment.

233. The fourth example where Canada seeks to rely on its own policies to excuse it from

liability under NAFTA Article 1102 for those same policies arises in its explanation of

the rationale behind the so-called “remoteness rule”. Again, for Canada, the fact that it

can offer a policy rationale for the differential treatment it accords log producers in

“remote” areas as opposed to “non-remote” areas means that these log producers are not

“in like circumstances” to one another. Canada explains that requiring log producers in212

“remote” areas to advertise their logs in minimum volumes of 2,800 m is a policy that is3

designed to make it economical for log purchasers to travel the distances required to

inspect the logs. The ultimate goal is apparently to prevent log producers from

circumventing the Surplus Testing Procedure by advertising their logs in sufficiently

small volumes to discourage offers from log producers. 213

234. In any event, as Former Royal Commissioner Peter Pearse points out in his Expert

Report, the objective of the Log Export Ban policy - the provision of an adequate supply

of logs in British Columbia for domestic production and the use of an export ban - is

unsustainable. Though the Federal Government has maintained this policy, British214

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Canada’s Counter Memorial at para. 358; Notice 102, section 1.2, Investor’s Schedule of Documents (Tab 22).217

Macpherson Expert Statement, December 14, 2008 at Section III.218


Columbia has found itself with a growing surplus of logs on the British Columbia Coast

over the past 10 years. In addition, the current glut of timber has been exaggerated by the

pine beetle infestation in the Interior. In short, the available supply of timber in both the

Coast and Interior regions far exceeds the demands of domestic mills. Pearse215

concludes:

The absence of a clear, substantive rationale for these federal controls aggravates

public debate about the policy, and gives rise to charges of unfair discrimination by the federal

government against private owners of forestland in this province. But it has more tangible effects

as well: it lowers the value of private forest resources and forest production, weakens property

rights, and narrows markets for timber.216

235. This policy is a perfect example of a regulatory regime run amok. The fundamental

purpose of the Log Export Control Regime is “to ensure that there is an adequate supply

and distribution of [logs] in Canada for defence and other needs.” There is no shortage217

of supply of logs for the needs either of defence or log processors. In addition, this policy

is environmentally unsustainable. This runs against any number of Canadian policies. 218

Canada has admitted that the purpose of the so-called “remoteness” rule is to prevent log

producers from circumventing the Surplus Testing Procedure. In light of the fact that219

there has never been a shortage of supply, there is no rational connection between this

“rule” and the underlying purpose of the Log Export Control Regime. Canada must not

be allowed to rely on such misguided policies to avoid liability under Article 1102.

d. Inter-regional Log Flows

236. Douglas Ruffle is a registered Professional Forester in the Province of British Columbia.

Mr. Ruffle provided an expert report which has been set out with this Reply Memorial.

Mr. Ruffle has considered the issue of inter-regional log flows and also the comments on

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Ruffle Expert Report, Section 4 at para. 4.6.1.220



that subject made by Canada’s experts. He was able to conclude that there are four forest-

sawmilling regions in BC and the US. These are:

a. the US Coast western Washington, western Oregon (west of the Cascade

Mountains) and northwestern California;

b. the BC Coast (west of the Coast Mountains);

c. the US Inland northeastern Washington (east of the Cascades), northern Idaho

and western Montana; and

d. the BC Interior southern BC portion (east of the Coast Mountains). 220

237. While log flows between these regions have generally been low, this is not the natural

state of the market. On the contrary, this state of affairs is the result of three factors that

keep these regions separate in terms of log markets.

238. The first factor is transportation distances and costs. Long transportation distances and221

high trucking and rail costs usually make it uneconomical to move logs from west to east

across the mountains in both BC and the US. This is why sawmills in the US Inland and

BC Interior source only small volumes of logs from the BC Coast. However, this is not

the case with respect to Merrill & Ring’s logs as very low water transportation costs

(rafting and barging) make log flows very economic between US Coastal mills and logs

from the BC Coast.

239. The second factor is the different forests (species and log sizes), which also affect end-

product market. Generally the size and species of most Coastal logs are incompatible with

many Interior and Inland sawmills and this limits the shipments of logs from the BC

Coast to the BC Interior and US Inland. There is however an important exception to

this. Some Interior mills and many more mills in the Inland Region saw Douglas-fir222

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and hemlock logs. There are significant supplies of small diameter Coastal logs, primarily

in the gang and chip-n-saw sorts of Douglas-fir and hem-bal, which are suitable for

Interior and Inland mills.

240. Merrill & Ring produces these small diameter logs which are also produced in the Interior

Wet Belt. The Wet Belt sub-region of the Interior has a climate similar to the Coast in

terms of higher rainfall and more moderate temperatures compared to most other areas in

the Interior. As a result western hemlock, red cedar and Douglas-fir are found in223

significant volumes in the Wet Belt and they have the same log characteristics as their

counterpart species found on the Coast. Logs harvested in the Wet Belt in terms of

species are very similar and could be interchanged with those produced by Merrill & Ring

and other producers on the Coast. This is evidenced by the fact that there are sawmills in

the Merritt and Kamloops areas of the Interior of BC, which have sourced logs from the

BC Coast.224

241. The third factor is the operation of the Log Export Control Regime. The reason greater

log volumes are not exported south is because of the log export regulations. This is a key

reason that the log markets of the Interior and US Inland Regions have not been

integrated. The difference is the log export regulations and not any differences between

the forests, sawmills or lumber products, as there are really none. The export225

regulations restrict the north-south movement of logs to mills and prevent the more

complete integration of free trade in log markets that would otherwise occur.

5. Merrill & Ring is Treated “Less Favorably” Than Domestic Investors

242. Canada has treated Merrill & Ring “less favorably” than these domestic log producers.

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Branter Witness Statement, December 9, 2008 at para. 5.226


Affidavit of Judy Korecky at para. 101.228

a. Merrill & Ring is Forced to Observe the Requirements of Notice

102 Other Log Producers in BC and Alberta Are Not

243. The most obvious way Canada has accorded Merrill & Ring “less favorable treatment” is

by forcing it to comply with the various requirements of Notice 102. Since Notice 102

only applies to log producers in BC, log producers in other Provinces such as Alberta are

not subject to its requirements. Canada does not dispute the fact that Notice 102 does226

not apply to log producers outside of BC. 227

244. In addition, since Notice 102 only applies to log producers with federal lands, it does not

apply to log producers with provincial lands, even if those lands are in BC. As a result,

Merrill & Ring receives “less favorable treatment” than log producers in Alberta, as well

as log producers with provincial lands in BC.

b. Merrill & Ring is Forced to Sell its Logs Domestically Log

Producers in Alberta are Not

245. Notice 102 requires Merrill & Ring to offer its logs for sale on the domestic market

before it can obtain export approval. This means that Merrill & Ring must advertise its

federal logs on the Federal Bi-Weekly List for a period of two weeks. If a log processor

places an offer on the advertised logs, those logs are subjected to the Surplus Testing

Procedure as administered by TEAC/FTEAC. If TEAC/FTEAC determines that any offer

placed on Merrill & Ring’s logs is within 5% of domestic market value, then Merrill &

Ring is effectively required to sell its logs at said price to the offering log processor. 228

The price at which Merrill & Ring is forced to sell its logs is invariably well below the

price it could receive on the export market.

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Branter Expert Statement at para. 5.229

Schaaf Witness Statement, February 12, 2008 at para 30.230

Kurucz Witness Statement, February 11, 2008 at para. 67.231

Branter Expert Statement at para. 6.232

246. Since Notice 102 does not apply to log producers in Alberta and other Provinces, there is

no regulatory impediment to log producers in those Provinces exporting their logs. As229

a result, they are spared all the agonies of the Surplus Testing Procedure, and are free to

export their logs at will at premium prices.

247. There can be no doubt that forcing Merrill & Ring to sell its logs on the domestic market

does constitute a form of “treatment”, and that this treatment is in fact “less favorable”

than that received by log producers in Alberta and other provinces.

c. Merrill & Ring is Forced to Sell its Logs under "Blockmail” Log

Producers in Alberta are Not

248. Because Notice 102 forces Merrill & Ring to advertise its logs for sale on the domestic

market before it can apply for export approval, it creates the conditions that make it

possible for log processors to subject Merrill & Ring to “blockmail”. Indeed, it would be

impossible for log processors to blockmail Merrill & Ring were it not for this

requirement. Because of blockmail, not only is Merrill & Ring forced to incur the costs

associated with managing this threat, but it is also forced to sell logs to log processors230

some of which they are in direct competition with at suppressed domestic market231

prices.

249. Since Notice 102 does not apply to log producers in Alberta and other provinces, they are

not exposed to the illicit practice of “blockmail”. As a result, neither do they have to232

incur the additional costs of dealing with blockmail, nor are they able to be coerced into

selling their logs on the domestic market.

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Notice 102, section 1.6, Investor’s Schedule of Documents (Tab 22). 234

Notice 102, section 1.5, Investor’s Schedule of Documents (Tab 22)235


250. However, Canada argues that since it is log processors who actually “blockmail” Merrill

& Ring, it is not responsible for the effects of this extortive practice. By this, Canada233

may be presumed to mean that there is no “treatment” here. This argument places form

over substance, and amounts to a denial of reality. Though it may be that Canada does

not actively blockmail Merrill & Ring itself, it is still responsible for enabling this

practice. The “treatment” Canada has accorded Merrill & Ring is the requirement to

abide by Notice 102 and the Surplus Testing Procedure. Blockmail is the direct

consequence of this treatment.

d. Merrill & Ring is Forced to Cut, Sort, and Scale its Logs in a

Particular Way Log Producers in the BC Interior and Alberta

Are Not

251. As Merrill & Ring has argued, Canada further accords Merrill & Ring “less favorable

treatment” by requiring it to cut, sort, and scale its logs in a particular way. This is

mandated by Notice 102, which requires logs to be scaled metrically, as well as sorted234

so as to conform to what are referred to as “normal log market practices”, which235

include the Coast Domestic Market End Use Sort Descriptions.

252. Canada has responded by arguing that the sorting requirements on the BC Coast to which

Merrill & Ring must adhere are “industry driven”, and, as such, that it has not accorded

Merrill & Ring any “treatment” in this respect. Canada’s attempt to portray sorting236

requirements as “industry driven” is misleading and incorrect. The differential sorting

requirements are sanctioned by Notice 102. Canada cannot deny that Notice 102

constitutes a “measure” that accords Merrill & Ring particular “treatment”. However, to

the extent that scaling and sorting requirements may be seen to be driven by industry at

all, it is important to remember that they are driven by the log processing industry, not the

log producing industry. In any event, BCMOF enforces these sorting requirements, and

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has done so with Merrill & Ring on many occasions. The enforcement of sorting237

requirements by a governmental body most certainly constitutes “treatment” for the

purposes of Article 1102. Each and every time Merrill & Ring is required to sort its logs

in accordance with the Coast Market End Use Sort Descriptions, it is subject to

“treatment”.

253. In the event this Tribunal agrees that requiring Merrill & Ring to sort its logs in a

particular way does constitute “treatment”, Canada argues that this “treatment” is not in

fact “less favorable”. Indeed, Canada goes so far as to argue that this “treatment” actually

benefits Merrill & Ring, since, according to Canada, it ensures that Merrill & Ring

obtains the best price possible for its logs. This is absurd. Merrill & Ring has been in the

log production business for well over 100 years, and knows how to obtain the best prices

for its logs. The best prices Merrill & Ring can obtain for its logs are on the world

markets, not the BC market. Merrill & Ring’s export customers do not want their logs

cut, sorted, and scaled in the way required by the Log Export Control Regime. This is

why Merrill & Ring often has to re-scale and re-sort its logs incurring extra expense in

the process if they end up passing the Surplus Testing Procedures and receiving export

approval. 238

254. Just like the Log Export Control Regime in general, the cutting, sorting, and scaling

requirements Canada forces upon Merrill & Ring are not designed for Merrill & Ring’s

benefit. They are created for the benefit of log processors not log producers. Canada

inadvertently admits as much when it states that “[m]arket specific sorting practices

accord the most favorable treatment available to processors in each market…” The239

benefit such sorting requirements provide to log processors comes at the expense of log

producers like Merrill & Ring.

255. Unlike Merrill & Ring, private forest landowners in Alberta and other provinces are free

to cut, sort, or scale their logs any way they please, and can perfectly cater to the needs of

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Branter Witness Statement, December 9, 2008 at para. 5.240

Investor’s Memorial at para. 361(c).241

Investor’s Memorial at para. 361(b).242

Notice 102, section 1.4, Investor’s Schedule of Documents (Tab 22). 243


Affidavit of John Cook at para. 81.245


their customers. Furthermore, log producers in the BC Interior, are not required to cut,240

sort, and scale their logs in accordance with the Coast Domestic Market End Use Sort

Descriptions. Coast log producers, who seek to export must comply with these241

mandatory rules. As a result, not only is there no question that the scaling and sorting

requirements Canada imposes on Merrill & Ring constitute “treatment”, but there can be

no doubt that this treatment is in fact “less favorable” than that accorded to log producers

in Alberta and other provinces, as well as to log producers in the BC Interior.

e. Merrill & Ring is Forced to Observe the So-Called “Remoteness

Rule” Other Log Producers on the South-Coast Are Not

256. Merrill & Ring has also argued that the fact that Canada has required it to observe the

so-called “remoteness rule” with respect to its logs in Theodosia further constitutes “less

favorable treatment”. This is required by Notice 102, which specifies that logs in242

“remote” areas on the BC Coast must be advertised in volumes no less than 2,800 m . 3 243

257. In response, Canada argues that Merrill & Ring’s Theodosia lands are not actually

considered “remote” the suggestion being that Merrill & Ring has never in fact been

subject to the so-called “remoteness rule” of Notice 102. Indeed, Canada goes so far244

as to say that none of Merrill & Ring’s lands are considered “remote”. Canada suggests245

that, as a result, it has not accorded any “treatment” to Merrill & Ring in this respect. 246

258. The fact is, however, that Canada has accorded Merrill & Ring “treatment” in this

respect. As Mr. Kurucz has explained, a BCMOF employee and TEAC/FTEAC member,

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Kurucz Reply Witness Statement, December 14, 2008 at paras. 5 & 8.247

Kurucz Reply Witness Statement, December 14, 2008 at para. 15. 248

Article 7 of the ILC Articles makes clear that a person empowered to exercise elements of governmental authority249

shall be considered to be an act of the state under international law, even if the act exceeds his authority or

instructions. In any event, as a FTEAC representative, Mr. Walders would be covered by ILC Article 4 which creates

direct state responsibility in this circumstance, Investor’s Book of Authorities (Tab 130).

Macpherson Expert Statement at para. 9.250


252

Please see our thorough review of the non transparent operation of the Log Export Control Regime in Section IV253

of this Reply Memorial.

Macpherson Expert Statement, December 14, 2008 at paras. 6 10.254

Bruce Walders, assured him that Merrill & Ring’s lands located in Theodosia are

considered “remote”, and logs from that area would have to be advertised in accordance

with the minimum volume requirement as specified in Notice 102. Since Mr. Walders247

was a representative of BCMOF and TEAC/FTEAC at the time, and acting in his capacity

as such, Canada is responsible under international law for his representation, regulated248

by FTEAC, even if the information were to be false. Further, it is not just the disputed249

Theodosia properties at issue that are remote. There is no question that the following of

Merrill & Ring’s properties are also “remote”: Charles Bay, East Thurlow, Hardwick

Island, Kanish/Waiatt, Loughborough Inlet/Jackson Bay, Unwin Lake and Minstrel

Island.250

259. Canada has cast aspersions upon Mr. Kurucz’ sworn statement, stating that it is

“unspecified” and “misleading”. , it is standard practice for251

BCMOF and TEAC/FTEAC not to put down in writing any representations they make. 252

This is consistent with the lack of transparency of the Log Export Control Regime in

general. In any event, it is not at all unreasonable for Merrill & Ring to have believed253

that its Theodosia lands are considered “remote”. Not only is the term “remote” not

defined anywhere, but, as Mr. Macpherson confirms, he considers Theodosia to be

“remote” as well. 254

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Kurucz Reply Witness Statement, December 14, 2008 at para. 19.258

Kurucz Reply Witness Statement, December 14, 2008 at para. 24. 259

260. In the case that Canada is deemed to have accorded Merrill & Ring “treatment” in this

respect, Canada argues that the treatment it has accorded is not “less favorable”, since,

according to Canada, it does not limit Merrill & Ring’s ability to export. Again,255

Canada’s argument is plainly absurd. The minimum volume requirement clearly limits

Merrill & Ring’s ability to export logs from its “remote” lands. Merrill & Ring is not

even able to initiate the export process for these logs until it has been able to assemble a

log sort of at least 2,800 m³. This is quite obviously a limitation on Merrill & Ring.

261. In any event, the question is not whether Merrill & Ring’s ability to export is limited.

The question is simply whether Merrill & Ring receives “less favorable treatment”. For

Merrill & Ring to be restricted in this way when its competitors are not, clearly

constitutes “less favorable treatment” for Merrill & Ring. Canada even admits as much

by recognizing that log producers may wish to circumvent the “remoteness” rule, in

particular by towing their logs to “non-remote” areas for advertisement. This is, in fact,256

what Merrill & Ring does. Yet contrary to what Canada suggests, having to tow its257

logs to address the impacts of this requirement is a major burden on Merrill & Ring. 258

Not only is it a burden in terms of risk and effort, but it is a burden in terms of cost. 259

262. For all these reasons, Canada has not only accorded Merrill & Ring “treatment” by

representing to it that its Theodosia lands are “remote”, but this treatment is in fact clearly

“less favorable” than that accorded to domestic investors with lands in “non-remote”

areas.

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Investor’s Memorial at para. 361(d).260


Letter from Lynn Sabatino to Richard Ringma (October 12, 2007), (Investor’s Schedule of Documents at Tab 74)262

Matkin Expert Opinion, December 11, 2008 at para. 6.263

As discussed earlier, this is set out in Article 27 of the Vienna Convention as well as in the ILC Article 32.264

f. Merrill & Ring is Forbidden from Obtaining Standing Exemptions

Log Producers on Provincial Lands Are Not

263. In addition to treating it less favourably by forcing it to abide by Notice 102, Merrill &

Ring has argued that Canada accords it “less favorable treatment” than provincial

landholders by forbidding it from obtaining standing exemptions for its federal lands.260

264. Canada has responded by claiming that it has no constitutional authority to grant standing

exemptions for federal lands. As a result, Canada asserts that it has not accorded Merrill

& Ring any “treatment” in this respect. 261

265. The issue here is very simple. Merrill & Ring is unable to obtain standing exemptions for

its lands. There are two main reasons for this. First, Canada refuses to grant standing

exemptions for federal lands, even though it grants standing exemptions for provincial

lands. Second, Canada has apparently adopted a policy of not allowing standing

exemptions even for provincial lands if those lands are located in the south-coastal region

of BC, even though it grants standing exemptions in all other regions of BC.262

266. In the context of this international legal dispute, it is immaterial what Canada thinks it

may or may not have the authority to do with respect to issuing standing exemptions.

Although it is abundantly clear that Canada does in fact have the authority to grant

standing exemptions for federal lands, under international law which is the governing263

law of this dispute Canada is prohibited from invoking its internal laws as an excuse for

violating its international obligations. With respect to Canada’s policy of not allowing264

standing exemptions for provincial lands located in the south-coastal region of BC a

policy that has absolutely nothing to do with its understanding of its constitutional

authority this argument applies a fortiori.

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265

266

267

267. In any event,

. This provides conclusive evidence that265

Canada has accorded Merrill & Ring less favourable treatment than its competitors on the

BC South Coast.

268. Standing exemptions are of enormous value to log producers, since they represent an

automatic bypassing of the Log Control Regime by allowing the guaranteed export of

reasons for this:

a) Since log producers with standing exemptions know ahead of time that

they will be able to export their logs, they can enter into predictable supply

contracts with their customers.

b) Since standing exemptions allow logs to bypass the Surplus Testing

Procedure, log producers that have them are immune from the ever-present

threats of “blockmail” and special targeting.

c) Since standing exemptions allow logs to bypass the Surplus Testing

Procedure, exempted logs will not deteriorate from infestation and

exposure to the elements as they wait for export approval.

d) Since standing exemptions represent a guarantee to log producers that they

will be able to export their logs, they know they will be able to receive the

best market price for their logs, not the artificially suppressed BC market

price.

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268

As a result, there can be no doubt that log producers that obtain standing exemptions are

granted more favourable treatment than those who cannot obtain them.



to Merrill & Ring’s competitors. There is no question that standing exemptions are of

tremendous value to log producers for several reasons. As a result, there can be no doubt

that by denying Merrill & Ring even the possibility of obtaining standing exemptions,

Canada accords Merrill & Ring “less favorable treatment” for the purposes of NAFTA

Article 1102.

g. Merrill & Ring is Forbidden from Advertising Standing Timber

Log Producers in the BC Interior Are Not

270. As Canada rightly points out, it allows some log producers to advertise their timber on the

Bi-Weekly List before it has been cut into logs. This is what Canada refers to as

"standing surplus applications" ("standing applications"). Canada notes that it only grants

standing applications to log producers in the BC Interior, regardless of whether the

associated timber is located on federal or provincial lands. By contrast Canada asserts

that it does not allow standing applications for log producers on the BC Coast. As a

result, Canada does not allow Merrill & Ring to advertise standing timber, even though it

allows other log producers in BC to do so.

271. There is a significant difference for log producers between having a standing exemption,

on the one hand, and, on the other, being able to advertise standing timber. A standing

exemption is far more valuable, since it allows log producers to bypass the Surplus

Testing Procedure and all the complications that come with that altogether. By268

contrast, log producers with lands not covered by standing exemptions, but with timber

they are able to advertise while it is still standing, enjoy a more modest benefit. Such log

producers must still endure the risks and uncertainties of the Surplus Testing Procedure

before being able to export their logs. However, the advantage they enjoy is that unlike

log producers like Merrill & Ring they do not have to actually cut their trees before

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269

270

271

272

Canada’s Counter Memorial at para. 407273

274

275

276

Ruffle Report at para. 4.6.4.277

being allowed to advertise their timber. As a result, unlike log producers like Merrill &269

Ring, they can avoid many of the drawbacks of the Log Export Control Regime.

Specifically, they can avoid having to cut, sort and scale their logs to the preferences of

local mills. They are also able to avoid blockmail and log blocking. In addition, they270 271

are able to avoid having their logs deteriorate due to infestation and exposure to the

elements while they wait to get through the Surplus Testing Procedure and obtain export

approval. Finally, they can enter into reliable long-term supply contracts, obtaining much

better prices than they could otherwise. 272

272. Canada claims never to have allowed a standing application on the BC Coast in the past

15 years. This is not the case. 273

. Further, Canada has allowed standing applications in the BC274

Interior in recent years, and continues to do so on a regular basis. This includes275

standing applications for timber located in the Wet Belt region of the BC Interior a276

region with very similar growing conditions as those on the BC Coast.277

273. Just like the issue of standing exemptions, this is a rather simple matter. Canada does not

allow Merrill & Ring to submit its timber to the Surplus Testing Procedure while it is still

standing. At the same time, Canada does allow Merrill & Ring’s competitors to submit

such standing applications. In light of all the aspects of the Log Export Control Regime

standing applications allow a log producer to avoid, there can be no doubt that by denying

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Schaaf Reply Witness Statement, December 12, 2008 at para. 7.278

Investor’s Memorial at para. 362(a). 279


Merrill & Ring even the possibility of submitting standing applications, Canada accords

Merrill & Ring “less favorable treatment” for the purposes of NAFTA Article 1102.

h. Merrill & Ring is Required to Pay a Fee-in-Lieu to Export its

Provincial Logs Federal Log Producers are Not

274. Merrill & Ring is further required to pay a fee-in-lieu of manufacture to the BC

government when it exports its provincial logs. Exporters of federal logs do not have278

to pay any fee-in-lieu of manufacture upon export of their logs. There can be no doubt

that this fee constitutes “less favorable treatment” to Merrill & Ring with respect to its

provincial logs.

6. The “Less Favourable Treatment” Received by Merrill & Ring is

With Respect to the Management, Operation and Sale of its

Investments

275. Having established first that Merrill & Ring is in “like circumstances” to other log

producers on the BC Coast, the BC Interior, and Alberta, and that Canada has accorded

Merrill & Ring “less favorable treatment” than those other log producers, we shall now

satisfy the requirements of the third step of NAFTA Article 1102 analysis, namely, that

the treatment Canada has accorded Merrill & Ring is “with respect to the establishment,

acquisition, expansion, management, conduct, operation, and sale or other disposition of

investments.”

276. Merrill & Ring has argued that the Log Export Control Regime impedes the way it

“manages” its investments, since it affects the way Merrill & Ring implements its harvest

plans forcing it to behave in an economically illogical manner. Merrill & Ring has279

also argued that the Log Export Control Regime “conducts” and “operates” its operations,

since it prevents Merrill & Ring from entering into long-term supply contracts, and forces

it to hire a log broker to help it navigate the many complexities of the Regime. Finally,280

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Investor’s Memorial at para. 362(c).281

Merrill & Ring has further argued that the Log Export Control Regime affects the “sale”

and “disposition” of its investments, since it forces Merrill & Ring to sell its logs to log

processors in BC. 281

277. Canada has not responded to any of these arguments. This is because it is simply

incontrovertible that the “less favorable treatment” Canada accords Merrill & Ring does

in fact impact Merrill & Ring’s investments in these ways. Without providing any

argument to the contrary, Canada must be taken to admit that the “less favorable

treatment” it accords Merrill & Ring is in fact “with respect to the establishment,

acquisition, expansion, management, conduct, operation, and sale or other disposition of

investments.” As a result, Merrill & Ring has satisfied the third and final step of national

treatment analysis under NAFTA Article 1102.

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The Investor continues to rely on the arguments made in the Investor’s Memorial, February 13, 2008 at paras.282

189 254 and 352 358.

IV. NAFTA ARTICLE 1105 – FAIR AND EQUITABLE TREATMENT

278. Through the operation of the Log Export Control Regime, there can be no doubt that

Canada has violated its obligation under NAFTA Article 1105(1) to accord Merrill &

Ring “fair and equitable treatment”.282

1. Overview

279. Canada has advanced a meaning to the international law standard of treatment contains in

NAFTA Article 1105 that is narrow and simply not in keeping with the text of the treaty.

The meaning of the international standard is well known and has been well canvassed by

many international tribunals, including other NAFTA tribunals. Canada argues for a

threshold standard of breach that is inconsistent with the principles of state responsibility

set out by the International Law Commission and by previous international investor-state

tribunals. If Canada’s approach were to be followed, there would be no protection for rule

of law and fundamental fairness issues within the NAFTA.

280. Canada has failed to meet its obligation to provide fair and equitable treatment to Merrill

& Ring in a number of ways with respect to its administration of the Log Export Control

Regime. In particular, Canada fails to meet its obligations to provide treatment in

accordance with the international law standard of treatment set out in NAFTA Article

1105 under the Log Export Control Regime as Merrill & Ring is subjected to unfair and

inequitable treatment including:







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d) The requirement to follow the additional rules for Merrill & Ring

properties located in the remote Coastal region;


is unnecessary; and,

f) The requirement to remit the fee-in-lieu on provincial rafts that are

exported.

281. The Log Export Control Regime is administered in a highly secretive and non-transparent

manner that flies in the face of the most fundamental aspects of the rule of law. The

Surplus Testing Procedure administered by TEAC/FTEAC is completely shrouded in

secrecy from beginning to end. Yet some of the most essential elements of Merrill &

Ring’s fundamental business operations are completely controlled by this non-transparent

administration of the log export control regime. Furthermore, Canada is entirely aware of

highly improper practices known as blockmailing which are taken by log processors to

further extract concessions from log producers who are unfortunate to be covered by the

terms of the Log Export Control Regime. Those log producers who are not covered by the

Log Export Control Regime, because they receive more favourable treatment, are exempt

from the application of these unethical practices which are enabled by Canada’s

administration fo the log export control regime.

282. Furthermore, there are serious questions about the natural justice and due process which

occurs with respect to TEAC/FTEAC on account of its composition. No private log

producers are permitted to sit on this body whereas log processors are always represented

despite their obvious interest in maintaining artifical log prices and onerous conditions

which benefit them at the cost of private producers like Merrill & Ring.

283. The onerous requirements under the Log Export Control Regime with respect to the

mandatory cutting and storage of logs as they await export certification compounds the

fundamental unfairness of the regime. Requirements to cut, sort and scale logs to the

preferences of local mills prevent log producers from being able to enter into long term

supply contracts with foreign customers. This results in highly impaired market

operations and significant losses for domestic log producers who are federally regulated.

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284. The elements of unfairness inherent in the Log Export Control Regime are cumulative to

each other. While each is individually unfortunate and harmful, when taken together these

elements are designed to harm private landowners for the benefit of domestic British

Columbia log producers.

2. “Fair and Equitable Treatment” Is an Autonomous Standard

285. NAFTA Article 1105(1) prescribes Canada’s duty to accord investments of foreign

investors a “minimum standard of treatment.” This provides an absolute standard of

treatment, regardless of how Canada treats investments of its own investors. NAFTA

Article 1105(1) reads:

Each Party shall accord to investments of investors of another Party treatment in accordance with

international law, including fair and equitable treatment and full protection and security.

Thus, the wording of NAFTA Article 1105(1) is clear: Canada must provide investments

of foreign investors “treatment in accordance with international law.”

286. Article 38(1) of the Statute of the International Court of Justice (“ICJ Statute”) outlines

the sources of international law. The sources of international law are as follows:

a. international conventions;

b. international custom, as evidence of a general practice accepted as law;

c. general principles of law; and

d. judicial decisions and the teachings of the most highly qualified publicists,

as subsidiary means for the determination of rules of law.

Thus, the express wording of NAFTA Article 1105(1) makes clear that Canada must

provide investments of foreign investors treatment in line with the rules and principles

established by these four sources of international law.

287. NAFTA Article 1131 sets out the governing law of a NAFTA Chapter 11 dispute.

NAFTA Article 1131(1) confirms that these sources of international law must be applied:

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Curiously, in support of this assertion, Canada quotes from Mondev, which does not at all support Canada’s285

position. As Canada highlighted, the Mondev Tribunal confirmed that “the standard of fair and equitable treatment

and full protection and security, is to be found by reference to international law, i.e.by reference to the normal

sources of international law…” See Canada’s Counter Memorial at para. 449. [emphasis added]

A Tribunal established under this Section shall decide the issues in dispute with this Agreement

and applicable rules of international law.

This merely confirms what every tribunal established pursuant to an international treaty

does: interpret the obligations contained in the treaty by reference to all the sources of

international law.

288. NAFTA Article 1131(2) further directs a tribunal to apply an interpretation of the Free

Trade Commission to a dispute. As Canada has rightly pointed out, on July 31, 2001,283

the Free Trade Commission issued Notes of Interpretation (“Notes”) with respect to

NAFTA Article 1105(1). The Notes provide, in relevant part, as follows:

1. Article 1105(1) prescribes the customary international law standard of treatment of aliens

as the minimum standard of treatment to be afforded to investments of investors of

another Party.

2. The concepts of “fair and equitable treatment” and “full protection and security” do not

require treatment in addition to or beyond that which is required by the customary

international law minimum standard of treatment of aliens.

According to the wording of NAFTA Article 1131(2), the Notes may be seen to be

binding on a tribunal.

289. Canada argues that the Notes restrict the meaning of NAFTA Article 1105(1) as requiring

treatment only in accordance with customary international law. Canada also argues284

that as a result of the Notes, this Tribunal may not apply the other normal sources of

international law in interpreting Canada’s obligation to provide investments of foreign

investors “fair and equitable treatment.” Canada’s interpretation of NAFTA Article285

1105(1) and the impact of the Notes is misguided.

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Article 31(1), Vienna Convention on the Law of Treaties, Investor’s Book of Authorities (Tab 41).286

In the Anglo Iranian Oil Co. Case (United Kingdom v. Iran), Judgement, ICJ Reports 1952 at p. 105, the court287

accepted the principle that a legal text should be interpreted to give effect to every word in the text, Investor’s Book

of Authorities (Tab 151)

290. This Tribunal is not only allowed to apply the normal sources of international law, but it

is required to do so.

291. First, the Notes leave unaltered NAFTA Article 1131(1), which directs a tribunal to apply

“applicable rules of international law” to NAFTA Chapter 11 disputes. These rules

include all the sources enumerated in Article 38(1) of the ICJ Statute not just the rules

of customary international law. The primary source of treaty interpretation is the wording

of the treaty itself, and NAFTA Article 1131(1) is clear: a tribunal shall apply “applicable

rules of international law.” A tribunal cannot, on the one hand, be directed to apply all

the applicable rules of international law, and, on the other, be restricted to applying only

the rules of customary international law. The Notes said nothing about discontinuing the

applicability of NAFTA Article 1131(1) with respect to NAFTA Article 1105(1). As a

result, NAFTA Article 1131(1) continues to apply to the entirety of NAFTA Chapter 11.

This gives rise to an irresolvable conflict. In such a situation, the strict wording of the

treaty itself necessarily trumps a loose interpretation thereof.

292. The second reason why Canada’s position on the Notes is not correct is that they run

counter to the plain and ordinary meaning of NAFTA Article 1105(1). The general rule

of treaty interpretation requires that a treaty be interpreted “in accordance with the

ordinary meaning to be given to the terms of the treaty in their context and in light of its

object and purpose.” NAFTA Article 1105(1) clearly states that Canada must “accord286

investments of investors of another Party treatment in accordance with international law”

not customary international law. The ordinary meaning of “international law” refers to

all sources of international law enumerated in Article 38(1) of the ICJ Statute not only

customary international law. The drafters of the NAFTA were fluent in the language of

international law, and were surely alert to the distinction. Professor Schreuer puts it287

quite plainly:

As a matter of textual interpretation, it is inherently implausible that a treaty would use an

expression such as “fair and equitable treatment” to denote a well known concept such as the

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C. Schreuer, “Fair and Equitable Treatment in Arbitral Practice”, (June 2005), J. World Invest. & Trade 375 at288

360, Respondent’s Book of Authorities (Tab 125); See also C. Schreuer, “Fair and Equitable Treatment (FET):

Interactions with Other Standards, (2007) 4:5 Transnat’l Disp. Mgmt. 1 at 9 10, Respondent’s Book of Authorities

(Tab 124).

Dolzer and Stevens, “Bilateral Investment Treaties” at p. 60, Investor’s Book of Authorities (Tab 150).289

UNCTAD, “Fair and Equitable Treatment” (1999) at 39. Investor’s Book of Authorities (Tab 157).290

“minimum standard of treatment in customary international law.” If the parties to a treaty want to

refer to customary international law, it must be presumed that they will refer to it as such rather

than using a different expression.288

293. In their treatise on bilateral investment treaties, Dolzer and Stevens confirm the

implausibility of the drafters of the NAFTA intending to confine the scope of the “fair

and equitable treatment” standard only to customary international law:

[S]ome treaties [like the NAFTA] refer to international law in addition to the fair and equitable

treatment, thus appearing to reaffirm that international law standards are consistent with, but

complementary to, the provisions of the [treaty].289

294. UNCTAD provides yet another explanation about the implausibility of equating fair and

equitable treatment with the international minimum standard:

Some items of State practice also support the view that the fair and equitable standard does not

necessarily amount to the international minimum standard. In a number of BITs involving the

United States, and in its model BIT, the fair and equitable standard is combined with full

protection and security, and this combined standard is reinforced by the rule that each party to the

agreement “shall in no case accord treatment less favorable than that required by international law”

(Article II(3)(a)). At the same time, however, the United States has consistently maintained that

customary international law assures the international minimum standard for all foreign

investments. This approach fair and equitable treatment with full protection and security on the

one hand, and treatment no less favourable than that required by international law on the other

suggests that the two sets of standards are not necessarily the same.290

295. In the end, carrying the Notes through to their logical conclusion would deprive the words

“fair and equitable treatment” in NAFTA Article 1105(1) of any meaning, thereby leading

to an absurd or unreasonable result. This runs counter to one of the most basic tenets of

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Publically available copies of bilateral investment treaties can be found on Westlaw’s bilateral investment treaty291

service (ICA BITREATIES).

UNCTAD, “Fair and Equitable Treatment” (1999) at 40,Investor’s Book of Authorities (Tab 157).292

treaty interpretation, by which no words in a treaty are to be deprived of their meaning, or

otherwise interpreted, so as to be rendered superfluous.

296. This Tribunal also must take into account the existence of over 2580 bilateral investment

treaties, the vast majority of which contain fair and equitable treatment provisions. The

overwhelming existence of this widespread acceptance of this obligation makes clear the

widespread recognition and acceptance of this obligation by state parties.291

297. In short, it is simply impossible that the Notes accurately reflect the Parties’ true intention

at the time they drafted the NAFTA. Accordingly, this Tribunal should interpret NAFTA

Article 1105(1) in accordance with its original wording. This means interpreting the

words “fair and equitable treatment” according to their ordinary meaning. As UNCTAD

aptly put it:

Where the fair and equitable standard is invoked, the central issue remains simply whether the

actions in question are in all the circumstances fair and equitable or unfair and inequitable.292

298. Even if there were any lingering doubt about the appropriateness of the Notes in light of a

textual analysis of the ordinary wording of NAFTA Article 1105(1), viewing NAFTA

Article 1105(1) in light of the objects and purpose of the NAFTA adds further weight to

the unlikelihood of the Parties having intended to restrict the meaning of NAFTA Article

1105(1) to just customary international law. NAFTA Article 102(1) sets out the

objectives of the NAFTA. These include the following:

a) Promoting transparency;

b) Eliminating barriers to trade in, and facilitating the cross-border movement

of, goods and services; and

c) Promoting conditions of fair competition.

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The public version of the negotiating history is available in Volume 3 of Barry Appleton, NAFTA: Legal Text and293

Interpretive Materials, (West Publishing: 2007).

C.H. Brower II, “Why the FTC Notes of Interpretation Constitute a Partial Amendment of NAFTA Article 1105”294

International Arbitration News, Summer 2005, Investor’s Book of Authorities (Tab 47).

There is nothing about interpreting the protections of NAFTA Article 1105(1) to be

limited to those recognized only by customary international law that serves to achieve

these objectives.

299. Although it is clear on its face that NAFTA Article 1105(1) was never intended to be

limited in this way, even in the event that any lingering uncertainty might justify recourse

to the travaux préparatoires of the NAFTA, this supplementary means of treaty

interpretation confirms that NAFTA Article 1105(1) was never intended to exclude

general principles of law. Shortly after the Notes were issued, the Pope & Talbot

Tribunal requested Canada to produce all drafting history materials supporting the

intention of the Parties’ to limit the reference to “international law” in NAFTA Article

1105(1) to “customary international law.” In response, Canada produced some 1,500

pages of documents in 43 drafts of the NAFTA. In all those pages and drafts, the

Tribunal was unable to detect a single intention by the Parties to restrict the meaning of

“international law” in NAFTA Article 1105 to “customary international law.”293

300. This gives rise to the third key reason why Canada’s interpretation of the Notes is not

binding on this Tribunal: they do not constitute a valid “interpretation” of NAFTA Article

1105, but, as Professor Chip Brower lays out clearly, are instead an “amendment”. A294

valid interpretation would have addressed the logical inconsistency left between NAFTA

Articles 1131(1) and 1131(2) namely, requiring international tribunals on the one hand

to decide issues in accordance with “applicable rules of international law”, and, on the

other, requiring them to decide issues only in accordance with customary international

law. A valid interpretation would also presumably be reflected in the ordinary meaning

of the words of the treaty, and, failing that, at least be supportable by reference to its

objects and purposes. At the very least, a valid interpretation would be supportable by

reference to the travaux préparatoires of the treaty itself. Yet nowhere is any such

support to be found for the Notes’ interpretation of NAFTA Article 1105(1). It is for this

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Pope & Talbot, Award in Respect of Damages at para. 47, Investor’s Book of Authorities (Tab 111).295

reason that after a detailed review of the drafting history of the NAFTA, the Pope &

Talbot Tribunal concluded that the substance of the Notes does in fact amount to an

“amendment” of the NAFTA, not an “interpretation”.295

301. This understanding of the Notes as an “amendment” as opposed to an “interpretation” is

an important one. There is nothing indelible about the NAFTA; as NAFTA Article 2202

makes clear, the Parties may agree to amend any of its provisions at any time. An

amendment is required where the Parties have reconsidered a fundamental aspect of their

agreement, and would like to change it. This, however, requires that all Parties agree, and

go through their respective processes to give legal effect to the amended agreement. By

contrast, an “interpretation” is required not where a change to a fundamental aspect of an

agreement is required, but rather where a mere clarification of, or elaboration upon the

terms of that agreement is needed. Unlike a formal “amendment”, an “interpretation” is

much easier to bring about; rather than requiring the Parties themselves to renegotiate the

agreement a process which can be cumbersome and time-consuming an

“interpretation” may be issued by a subsidiary body in this case the Free Trade

Commission. If the Parties wanted to amend Article 1105(1) of the NAFTA, they were

and indeed still are fully within their rights to do so. However, an amendment is a

serious matter that requires the Parties to follow the proper procedures. In the case of the

Notes, the Parties did not follow the proper procedures; rather, they sought to amend the

NAFTA through a less cumbersome and more politically expedient channel. This was an

improper attempt to circumvent the requirements of the NAFTA, and disguise an

“amendment” in the garb of an “interpretation”. This amendment is therefore ultra vires

the powers of the Free Trade Commission, and of no legal force or effect.

302. For all the above reasons, this Tribunal should consider itself at liberty to interpret the

meaning of “fair and equitable treatment” as contained in NAFTA Article 1105(1) as an

autonomous standard in accordance with all the normal and well-accepted sources of

international law not just customary international law.

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D.W. Greig, International Law at p. 26, Investor’s Book of Authorities (Tab 152).296

3. It is Customary to Interpret Treaties in Accordance with All Sources

of International Law

303. Even if the Tribunal decides that the Notes are valid and binding or otherwise decides

to demur on the matter it should still interpret the “fair and equitable treatment”

standard contained in NAFTA Article 1105(1) with reference to all sources of

international law. This is because the practice of deciding international legal disputes

with reference to all the sources of international law is in-and-of-itself customary

international legal practice.

304. As is well known, customary international law is comprised of two essential elements:

consistent state practice, and opinio juris. That is, customary international law is formed

by the consistent practice of states acting in the belief that their behaviour is legally

required. Absent either of these two elements, a practice will not obtain the status of296

customary international law.

305. International legal disputes are always resolved in accordance with all the rules and

principles of international law. Respondent States always engage in these disputes

knowing that they will be decided in accordance with the rules and principles of

international law. They always do so in the belief that they are legally required to do so.

If it were otherwise, States would not agree to submit their disputes to the International

Court of Justice for resolution, since Article 38(1) of the ICJ Statute specifically states

that disputes shall be interpreted with reference to all the sources of international law. As

a result, the necessary elements of consistent state practice and opinio juris are both

present in the practice of international legal dispute resolution. Resolving international

legal disputes in accordance with all the rules and principles of international law is thus a

part of customary international law.

306. Thus, even if the Notes are valid and binding, and the Tribunal is required only to

interpret NAFTA Article 1105(1) in accordance with customary international law, it may

nonetheless do so with reference to the full array of sources of international law, as is

customary.

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See, for example, Canada’s Counter Memorial at para. 454, where it argues that “the decisions of international297

tribunals dealing with good faith referred to by the Investor in its Memorial are…completely irrelevant…” Also at

para. 474, where Canada further submits that “[d]ecisions rendered in the context of non NAFTA investor State

arbitration are not relevant for this Tribunal in determining the content of NAFTA Article 1105.”

Gulf of Main Case at paras. 91 & 92. [emphasis added], Investor’s Book of Authorities (Tab 135).298

4. The “Fair and Equitable Treatment” Standard May Be Inferred from

International Jurisprudence

307. Since it is customary to resolve international legal disputes in accordance with all the

rules and principles laid out in Article 38(1) of the ICJ Statute, this Tribunal is not as

Canada argues precluded from discerning the content of the fair and equitable297

treatment standard in light of the other international tribunal decisions.

308. While there can be no doubt that customary international law is comprised of state

practice and opinio juris, nothing in international law suggests as Canada does that

the decisions of international tribunals may not be used to ascertain what these elements

are. As the ICJ famously proclaimed of the North Sea Continental Shelf cases:

That Judgment, while well known to have attributed more marked importance to the link between

the legal institution of the continental shelf and the physical fact of the natural prolongation that

has subsequently been given to it, is nonetheless the judicial decision which has made the greatest

contribution to the formation of customary international law in this field.

Subsequently, the Court of Arbitration’s Decision of 30 June 1977 on the elimination of the

continental shelf between France and the United Kingdom confirms on this point the Court’s

conclusion in the North Sea Continental Shelf cases and enunciates as follows the general rule of

customary international law on the matter: “failing agreement, the boundary between States

abutting on the same continental shelf is to be determined on equitable principles.298

From this we can see that, for the International Court of Justice at least, not only may

international jurisprudence be referred to in order to “enunciate” customary international

law, but it may even contribute to the actual “formation” of customary international law.

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ADF at para. 184 [emphasis added], Respondent’s Book of Authorities (Tab 2).299

Christoph Schreuer, “Fair and Equitable Treatment in Arbitral Practice” at 1, Respondent’s Book of Authorities300

(Tab 125).; OECD, “Fair and Equitable Treatment Standard in International Investment Law”, September 2004 at 5,

Respondent’s Book of Authorities (Tab 107).

309. The propriety of drawing from international jurisprudence to ascertain the scope of the

“fair and equitable treatment” standard contained in NAFTA Article 1105(1) has also

been affirmed by NAFTA Tribunals. As the Tribunal in ADF noted:

[A]ny general requirement to accord ‘fair and equitable treatment’ must be disciplined by being

based upon State practice and judicial or arbitral case law or other sources of customary or

general international law.299

For the Tribunal in ADF, then, it is clear that it is not only permissible to inform the

meaning of the customary “fair and equitable treatment” in NAFTA Article 1105(1) with

reference to international jurisprudence, but it is in fact required. Even more importantly,

the ADF Tribunal also confirmed the requirement to interpret NAFTA Article 1105(1) in

accordance with the other sources of international law contained in Article 38(1) of the

ICJ Statute.

310. NAFTA Article 1105(1), like most investment protection treaties, provides for “fair300

and equitable treatment”, which, as the very wording of NAFTA Article 1105(1) itself

purports to make clear, is part of customary international law. This standard has been the

subject of numerous disputes, and has been developed by a wide array of international

tribunals in what has become a rich history of case law. Yet Canada would have this

Tribunal turn a blind eye to this history, and branch out on its own in the misguided

notion that the meaning of “fair and equitable treatment” in NAFTA Article 1105(1) is

somehow different from the meaning of the same customary standard contained in

thousands of other investment protection treaties.

311. By way of explanation, Canada argues that the “fair and equitable treatment” standard in

the NAFTA context is somehow narrower than the standard contained in non-NAFTA

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See OECD, “Fair and Equitable Treatment Standard in International Investment Law” at 2: “[The fair and303

equitable treatment standard] became established as a principle mainly through the increasing network of bilateral

investment treaties.” Respondent’s Book of Authorities (Tab 107); See also P. Juillard, “L’évolution des sources du

droit des investissements”, Recueil des Cours, Tome 250, 1994, from 132 134, Investor’s Book of Authorities (Tab

136).

investment treaties. Curiously, Canada is unable to specify in any concrete way how301

the standards might differ. Canada further suggests that, unlike the “fair and equitable

treatment” standard contained in NAFTA Article 1105(1), the inexplicably different

standard contained in non-NAFTA investment treaties has not yet “crystallized” into a

rule of customary international law. Canada is ostensibly only prepared to concede the302

relevance of the “fair and equitable treatment” standard contained in non-NAFTA

investment treaties if Merrill & Ring is able to specifically prove that it has achieved the

status of customary international law but only without referring to international

jurisprudence. Canada offers no hint as to how this onus of proof might be satisfied.

312. Specifically proving that the “fair and equitable treatment” standard in non-NAFTA

investment treaties has “crystallized” into a rule of customary international law without

reference to international jurisprudence is not only nonsensical, but also highly

impractical. To deny that there is any useful overlap between the two supposedly

different standards is to engage in an act of willful blindness. To insist that it would be

improper to admit any useful overlap between the two only after an investor has

specifically proven the elements of consistent state practice and opinio juris without

making reference to international jurisprudence is to accept a formalistic view of

investor-state arbitration that would place an unduly onerous burden of proof upon any

wronged investor. There is nothing fair or equitable about such an approach.

313. In any event, specifically proving that the “fair and equitable treatment” standard in non-

NAFTA investment treaties has “crystallized” into a rule of customary international law

is in fact not even necessary. There can be no doubt that the “fair and equitable

treatment” standard and the principle of “good faith” it embodies at least qualifies as a

general principle of law. Since the resolution of international disputes in accordance303

with all the sources of international law including both general principles of law and

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ADF at para. 179, Investor’s Book of Authorities (Tab 50); Loewen, Award, Respondent’s Book of Authorities304

(Tab 75).

Sempra at para. 302, Respondent’s Book of Authorities (Tab 126) ; Enron at para. 258, Respondent’s Book of305

Authorities (Tab 44) .

decisions of international tribunals is in-and-of-itself a rule of customary international

law, there is nothing that precludes this Tribunal from drawing from this general principle

as interpreted by international jurisprudence to inform the content of the “fair and

equitable treatment” standard in the NAFTA context.

314. As a result, regardless of the relationship between the “fair and equitable treatment”

standard in NAFTA Article 1105(1) and the “fair and equitable treatment” standard in

other investment protection treaties, it is entirely permissible for this Tribunal to draw

from international jurisprudence on the latter to inform the meaning and content of the

former. In fact, it can do so without even having to determine the relationship between the

two. This is a permissible, legally sound and practical approach.

5. The Autonomous “Fair and Equitable Treatment” Standard

and the International Law Standard Have Converged

315. Even if the “fair and equitable treatment” standard is in fact part of customary

international law, then it has greatly advanced the international law standard far beyond

what Canada would have the Tribunal believe. Indeed, such has been the development of

the “fair and equitable treatment” standard in recent years that the plain meaning

approach, on the one hand, and, on the other, the minimum standard approach, have

largely converged.

316. NAFTA Tribunals have determined that for the purposes of NAFTA Article 1105(1), to

the extent that customary law is to be applied, it is to be applied as it stands today. 304

Recent jurisprudence on the “fair and equitable treatment” standard indicates that, while

it is possible that there may still be some residual difference between the autonomous

standard and customary law standard, this difference is fast disappearing.305

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Azurix at para. 361, Respondent’s Book of Authorities (Tab 8).306

Azurix at para. 364, Respondent’s Book of Authorities (Tab 8).307

CMS Gas at para. 284, Respondent’s Book of Authorities (Tab 28).308

Rumeli at para. 609, Investor’s Book of Authorities (Tab 137).309


317. The Azurix Tribunal explained this convergence as follows:

…the minimum requirement to satisfy the [fair and equitable treatment] standard has evolved…and

its content is substantially similar whether the terms are interpreted in their ordinary meaning…or

in accordance with customary international law.306

…The question whether fair and equitable treatment is or is not additional to the minimum

treatment required under international law is a question about the substantive content of fair and

equitable treatment and, whichever side of the argument one takes, the answer to the question may

in substance be the same.307

318. The Tribunal in CMS Gas took this one step further, and determined that there is in fact

no difference between the autonomous “fair and equitable treatment” standard and the

international minimum standard:

…the treaty standard of fair and equitable treatment…is not different from the international law

minimum standard and its evolution under customary law.308

319. This view was further adopted by the Tribunal in the Rumeli case, which, after noting that

there was agreement even between the parties that “fair and equitable” encompasses such

concepts as transparency, arbitrary or discriminatory treatment, good faith, and procedural

due process, stated as follows:309

The only aspect [of the fair and equitable treatment obligation] is that for Respondent, the concept

does not raise the obligation on Respondent beyond the international minimum standard of

protection. The Arbitral Tribunal considers that this precision is more theoretical than real. It

shares the view of several ICSID tribunals that the treaty standard of fair and equitable treatment is

not materially different from the minimum standard of treatment in customary international law.310

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320. Since it is clear that customary international law may be inferred by international

jurisprudence, and since that jurisprudence demonstrates that there is now a convergence

between the “fair and equitable treatment” standard and the international law standard,

the question about the impact of the FTC’s Notes is largely academic. Whether “fair and

equitable treatment” is an autonomous standard to be interpreted in accordance with all

the sources of international law, or whether it is to be understood as restricted to only

customary international law, the end result appears to be the same: NAFTA Article

1105(1) requires Canada to accord foreign investors “fair and equitable treatment” in

accordance with the plain and ordinary meaning of the term.

6. The Content and Scope of “Fair and Equitable Treatment”

321. Merrill & Ring has already thoroughly canvassed the scope and content of the “fair and

equitable treatment” standard in its Memorial. The Investor’s Memorial set out the

jurisprudence that does demonstrate that the standard of “fair and equitable treatment” in

NAFTA Article 1105(1) is guided by the overarching principle of “good faith”, and

requires that Canada do the following:

• Act in accordance with basic fairness and fundamental justice;311

• Act in a non-arbitrary and non-discriminatory manner;312

• Respect foreign investors’ legitimate expectations;313

• Deal with foreign investors according to basic principles of openness and

transparency;314

• Ensure that it not abuse its rights in regulating foreign investors; and315

• Provide foreign investors with a basic level of security of the legal and

business environment.316

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UNCTAD, “Investor State Dispute Settlement and Impact on Investment Rulemaking” (2007) at 46,317








322. A recent UNCTAD study summarizes these elements by stating:

…the overall result of the arbitral decisions to date is that the fair and equitable treatment standard

no longer prohibits solely egregious abuses of government power, or disguised uses of government

powers for untoward purposes, but any open and deliberate use of government powers that fails to

meet the requirements of good governance, such as transparency, protection of the investor’s

legitimate expectations, freedom from coercion and harassment, due process and procedural

propriety, and good faith.317

323. Canada argues that none of these recognized elements of “fair and equitable treatment”

are actually included in NAFTA Article 1105(1). That is, Canada denies that “fair and

equitable treatment” in NAFTA Article 1105(1) provides foreign investors with any

protection from arbitrary or discriminatory state conduct, protects any expectations318

foreign investors may legitimately have, requires Canada to abide by any standards of319

transparency in its dealings with foreign investors, obliges Canada in any way to ensure320

that foreign investors are free to operate in a secure legal and business environment, or321

otherwise prevents Canada from engaging in any sort of behavior that would be

recognized as an abuse of rights. Indeed, Canada even goes so far as to suggest that322

NAFTA Article 1105(1) does not require Canada to respect the overarching principle of

“good faith”. Canada would have us believe that NAFTA Article 1105(1) is virtually323

devoid of any content at all.

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For example, under Article 26 of the Vienna Convention, Canada is required to perform its obligations under324

NAFTA in good faith.

S.D. Myers at para. 134, Investor’s Book of Authorities (Tab 39); Tecmed at para. 153, Investor’s Book of325

Authorities (Tab 55); Eureko at para. 235, Investor’s Book of Authorities (Tab 56); Siemens at para. 308, Investor’s

Book of Authorities (Tab 138); Rumeli v. Kazakhstan at para. 609, Investor’s Book of Authorities (Tab 137).

Enron at para. 263, Respondent’s Book of Authorities (Tab 44); Azurix at para. 372, Respondent’s Book of326

Authorities (Tab 8); Tecmed at para. 153, Investor’s Book of Authorities (Tab 55). On this point, the position of the

Genin Tribunal cited by Canada at para. 558 is to be seen as an outlier.

Canada’s Counter Memorial at FN 484.327

a. Canada Need Not Act in Bad Faith to Breach its Duty to Act in

Good Faith

324. Canada’s denial that “fair and equitable treatment” in NAFTA Article 1105(1) requires it

to act in good faith is surprising. That “good faith” is an overarching principle of

international law is so well settled that any suggestion to the contrary is simply not

credible. As an overarching principle of international law, the principle of “good faith”

finds expression in a number of international obligations. One such obligation is the324

duty of a host State to provide foreign investors “fair and equitable treatment.” This

connection between the principle of “good faith” and the “fair and equitable treatment”

standard has been recognized by numerous Tribunals.325

325. Yet while the overarching duty of good faith may find expression in the “fair and

equitable treatment” standard, it is not an essential element of it. This too has been

affirmed by several Tribunals. As a result, while bad faith may serve as an indication326

that there has been a breach of “fair and equitable treatment”, it is not necessary that a

state act in bad faith to violate this obligation. Indeed, Canada even recognizes as such

when it quotes from an UNCTAD study, which notes that “the content of the fair and

equitable treatment standard no longer requires bad faith or “outrageous” behaviour on

behalf of the host country.”327

326. Thus, even if Canada is found not to have acted in bad faith, it may nonetheless be said to

have violated its obligation to provide Merrill & Ring with “fair and equitable treatment.”

b. Breach of Any One of the Elements of “Fair and Equitable

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Treatment” is Sufficient but not Necessary for a Violation of

NAFTA Article 1105(1)

327. Although the “fair and equitable treatment standard” is comprised of all the above-noted

elements, a violation of this standard does not require a breach of each of these elements.

Rather, breach of any one of the elements may be sufficient but is not necessary to

constitute a breach of the overall standard.

328. Canada, however, sees it differently. In defense of its highly implausible position that

none of the obligations Merrill & Ring referred to in its Memorial are actually part of the

“fair and equitable treatment” standard contained in NAFTA Article 1105(1), Canada

reasons that none of these standards are “stand alone” obligations amounting to

customary rules of international law in-and-of-themselves.328

329. Canada’s reasoning here is backwards. If the “fair and equitable treatment” standard has

in fact attained the status of customary international law, then it is the “fair and equitable

treatment” standard not its component parts that forms the customary international

law rule. The failure to act in accordance with any one of the elements of “fair and

equitable treatment” does not necessarily trigger a violation of NAFTA Article 1105(1)

in-and-of-itself although it could. The triggering of NAFTA Article 1105(1) by conduct

that can be categorized under a single constituent category, however, is not what is

required. The various elements of the “fair and equitable treatment” standard are not

independent silos; rather, they are mere indicia of what might be seen as treatment that is

unfair and inequitable. Acting contrary to only one of these indicia may be sufficient

though not necessary to constitute a breach of “fair and equitable treatment”.

330. In his Expert Legal Opinion, Professor Robert Howse has considered this issue. He

concludes that many elements of unfair treatment such as vagueness, uncertainty and non-

transparency can act together to form a violation of fair and equitable treatment. In the

context of considering Prof. Reisman’s unusually restrictive concept of governmental

measures, Prof. Howse opines:

47. A regulatory regime may be constructed in such a way as to leave considerable vagueness

and uncertainty as to what a “routine and proper application” of the regime is. Indeed,

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under NAFTA and the customary international law of “fair and equitable treatment”

vagueness, uncertainty and non transparency in a regulatory regime may individually or

cumulatively contribute to a violation of “fair and equitable treatment” if they sufficiently

impair the investor’s entitlement to a reasonably stable and predictable legal and

regulatory environment in which to operate its investment.

48. But there may be some instances where the violation of fair and equitable treatment

results from a combination of a vague, uncertain and non transparent regulatory scheme

and the arbitrary and/or discriminatory individual exercises of discretion that such a

scheme permits or indeed invites.

49. This is even clearer when interpreting a treaty like the NAFTA, the interpretative

instructions of which direct this Tribunal to Article 102 to interpret NAFTA obligations

through the principles and rules including national treatment, most favored nation

treatment and transparency.

50. In such cases, under Professor Reisman’s test it is very hard to discern whether such

instances of violation of fair and equitable treatment could be comprehended as a “routine

and proper application” of a regulatory scheme that allows broad uncontrolled discretion,

or whether the violation would have to be considered as in the application, which could

then only be challenged as a non routine or improper application of the scheme. Thus, an

investor would be faced with fundamental uncertainty as to when to bring its claim and

how to state its claim.

51. But the standard rules of state responsibility do not pose this kind of uncertainty, as

extended by the NAFTA to the challenge of statutory and regulatory schemes as such and

including all along individual applications of such schemes, comprehend a full spectrum

of state actions and omissions that can amount, individually and/or cumulatively, to

treatment of the investor that falls below the standard of fair and equitable treatment, or

indeed national treatment. Indeed, the very concept of treatment suggests that, with

respect to NAFTA Articles 1102 and 1105, state responsibility must extend throughout

such a spectrum.

331. Take, for example, the relationship between “arbitrariness” and the “fair and equitable

treatment” standard. In discussing this relationship, the LG&E Tribunal noted:

…characterizing the measures as not arbitrary does not mean that such measures are characterized

as fair and equitable… it was not arbitrary, though unfair and inequitable, not to restore the Gas

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LG&E at paras. 162 163, Respondent’s Book of Authorities (Tab 71).329

Energy Charter Treaty, Article 10(1), Investor’s Book of Authorities (Tab 139).330

Petrobart v. The Kyrgyz Republic, Award, Arbitration Institution of the Stockholm Chamber of Commerce, (29331

March 2005) at p. 76, Investor’s Book of Authorities (Tab 140).

Noble Ventures at para. 182, Respondent’s Book of Authorities (Tab 99).332

Law or the other guarantees related to the gas distribution sector and to implement the contract

renegotiation policy.329

332. The Petrobart Tribunal approached the “fair and equitable treatment” analysis in a

similar vein. That case involved a claim advanced under Article 10(1) of the Energy

Charter Treaty. Article 10(1) provides:

Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and

create stable, equitable, favourable and transparent conditions for Investors of other Contracting

Parties to make Investments in its Area. Such conditions shall include a commitment to accord at

all times to Investments of Investors of other Contracting Parties fair and equitable treatment…330

333. Rather than scrutinize the Kyrgyz Republic’s actions under each obligation mentioned in

Energy Charter Treaty Article 10(1) separately, the Tribunal amalgamated all of these

elements under a single analysis of “fair and equitable treatment”:

The Arbitral Tribunal does not find it necessary to analyse the Kyrgyz Republic’s action in relation

to the various specific elements in Article 10(1) of the Treaty but notes that this paragraph in its

entirety is intended to ensure a fair and equitable treatment of investments.331

334. The Tribunal in Noble Ventures v. Romania also followed a similar approach. In

determining whether Romania had violated the “fair and equitable treatment” provision

of the Romania-US BIT, the Tribunal was careful to note that a violation of one or more

of the standard’s constituent elements does not necessarily mean that the standard has not

in fact been breached.332

335. Thus, should the Tribunal find that Canada has acted contrary to one of the indicia of

“fair and equitable treatment”, it may legitimate conclude that Canada has breached its

obligations under NAFTA Article 1105(1).

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c. The Threshold for a Breach is Far Lower than Canada Contends

336. Canada contends that the threshold for a breach under NAFTA Article 1105(1) is a high

one. However, the threshold for a breach of NAFTA Article 1105(1) is not as high as333

Canada claims.

337. Canada cites the International Court of Justice’s decision in ELSI to argue that to the

extent that NAFTA Article 1105(1) does protect foreign investors from “arbitrary” State

behavior the threshold for a breach requires that the impugned behaviour “displays a

willful disregard of due process of law…which shocks, or at least surprises, a sense of

judicial propriety.” Canada then goes on to point out that a number of tribunals have334

adopted this standard in determining whether conduct was “arbitrary.” Though it does

not say it, Canada’s argument seems to be that because tribunals have adopted the ELSI

standard for “arbitrariness”, the standard for a breach of any of the other elements of “fair

and equitable treatment” under NAFTA Article 1105(1) is also high.

338. In advancing this argument, Canada rightly points out that contrary to its assertion that

“arbitrariness” is not covered by NAFTA Article 1105(1) NAFTA tribunals have

decided that NAFTA Article 1105(1) does in fact preclude a State from engaging in

arbitrary conduct. Canada, however, offers an incorrect and incomplete account of the335

jurisprudence in its discussion.

339. For example, Canada suggests that the Mondev Tribunal expressly endorsed the ELSI

threshold in its decision. In fact, the Mondev Tribunal did just the opposite it used336

the ELSI case as a backdrop against which it adopted a much lower threshold. In this

respect, the Tribunal stated the following:

The test is not whether a particular result is surprising, but whether the shock or surprise

occasioned to an impartial tribunal leads, on reflection, to justified concerns as to the judicial

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Mondev at para. 127, Respondent’s Book of Authorities (Tab 87); Loewen, Award on Jurisdiction at para. 131,337


Mondev at para. 116, Respondent’s Book of Authorities (Tab 87).338

Pope & Talbot, Investor’s Book of Authorities (Tab 48); ADF Waste Management, Investor’s Book of339

Authorities (Tab 50); GAMI, Investor’s Book of Authorities (Tab 59).

Iurri Bogdanov v. Moldova at p. 10, Investor’s Book of Authorities (Tab 141); Eureko at para. 234, Investor’s 340


Saluka, para. 460, Respondent’s Book of Authorities (Tab 123).341

propriety of the outcome…In the end, the question is whether, at an international level and having

regard to generally accepted standards of the administration of justice, a tribunal can conclude in

the light of all the available facts that the impugned decision was clearly improper and

discreditable, with the result that the investment has been subjected to unfair and inequitable

treatment.337

Indeed, for the Mondev Tribunal, the threshold for a violation of “fair and equitable

treatment” was not that high at all, and it rejected the suggestion that it requires a standard

of conduct that is “outrageous” or even “egregious”. 338

340. Canada glosses over the fact that many other Tribunals NAFTA and non-NAFTA alike

have taken a similar approach, confirming that a violation of “fair and equitable

treatment” need not be triggered by an act that can be characterized as “outrageous” or

“egregious”. Indeed, Canada outright ignores the fact that several tribunals have339

determined that a violation of “fair and equitable treatment” may be triggered by

behaviour that is simply “unreasonable”. Canada neglects to mention that in the340

context of its “fair and equitable treatment” analysis, the Tribunal in Saluka drew a close

relationship between “reasonableness” and “fair and equitable treatment”:

The standard of “reasonableness” has no different meaning in this context than in the context of the

“fair and equitable treatment” standard with which it is associated; and the same is true with regard

to the standard of “non discrimination”. The standard of “reasonableness” therefore requires…a

showing that the State’s conduct bears a reasonable relationship to some rational policy, whereas

the standard of “non discrimination” requires a rational justification of any differential treatment of

a foreign investor.”341

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Continental Casualty at para. 254, Investor’s Book of Authorities (Tab 142).342

MTD Equity at para. 17, Investor’s Book of Authorities (Tab 124); Azurix at para. 360??, Investor’s Book of343

Authorities (Tab 67); and Siemens at para. 290??, Investor’s Book of Authorities (Tab 138).

341. The nexus between “fair and equitable treatment” and the duty to act “reasonably” was

affirmed by the Tribunal in the Award in Continental Casualty, which stated:

…the fair and equitable standard is aimed at assuring that the normal law abiding conduct of the

business activity by the foreign investor is not hampered without good reasons by the host

government and other authorities.342

342. Canada also fails to point out that the Tribunals in MTD Equity, Azurix, and Siemens all

affirmed that, in the context of “fair and equitable treatment” analysis, what is required is

“treatment in an even-handed and just manner, conducive to fostering the promotion of

foreign investment.” Where the treatment in question is seen to be unjust or not even-343

handed, there may be a violation of “fair and equitable treatment.”

343. In light of the findings of recent Tribunals such as in Azurix and CMS Gas that there is a

dwindling distinction between the treaty standard of “fair and equitable treatment” and

the international minimum standard, the threshold for a breach of NAFTA Article

1105(1) is not as high as Canada would have us believe. Not only does the obligation to

accord foreign investors “fair and equitable treatment” require Canada to act in a non-

arbitrary and non-discriminatory manner, but it also requires Canada to act reasonably.

Where there is no reasonable relationship between Canada’s actions and a rational policy,

it fails to act reasonably, thereby violating its duty to provide “fair and equitable

treatment”.

d. The Test is a Flexible one to be Applied in All the Circumstances

344. What amounts to a violation of the “fair and equitable treatment” standard is necessarily

specific to each case. Admittedly, there is as of yet no general agreement on the precise

content and scope of the customary standard of “fair and equitable treatment”. This stems

from the inherently supple nature of the standard. There simply is no easy formula that

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Waste Management at para. 99, Investor’s Book of Authorities (Tab 58).344

See, for example, C. Schreuer, “Fair and Equitable Treatment in Arbitral Practice” at 370, where he states that345

there is an “evolving trend towards a higher standard of protection against State interference.”, Respondent’s Book

of Authorities (Tab 125).

Mondev, Award at para. 118, Respondent’s Book of Authorities (Tab 87).346

can apply to all cases. As the Waste Management Tribunal noted, “the standard is to

some extent a flexible one which must be adapted to the circumstances of each case.” 344

345. While this may lead to a certain level of uncertainty as to exactly what constitutes a

violation of “fair and equitable treatment”, there is at least this much that is certain: the

more grievous and numerous the violations of these various indicia, the more likely there

is to be a violation of the duty to provide “fair and equitable treatment”. What is also

certain is that the trend has for some time now been evolving towards a higher customary

law standard of investment protection from State interference.345

346. Bearing all this in mind, all this Tribunal needs to ask itself is this: in light of all the

circumstances of this case, with a view to all the sources of international law, and in the

understanding that there has in recent years been a rapid convergence between the

autonomous treaty standard of “fair and equitable treatment” and the customary

international law standard, has Canada violated its obligation to accord Merrill & Ring

the type of “fair and equitable treatment” guaranteed by NAFTA Article 1105(1)?

347. As straightforward as this question may seem, at this point in the discussion it still

remains somewhat abstract. As the Mondev Tribunal pointed out:

A judgment of what is fair and equitable cannot be reached in the abstract; it must depend on the

facts of the particular case.346

And as the Tribunal in Rumeli put it:

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This is why Canada was unable to produce any responsive documents in response to Merrill & Ring’s Document350

Request #36, Investor’s Schedule of Documents (Tab 84), by which it requested that Canada produce all

“[d]ocuments since April 1, 1998 evidencing the procedure or protocols TEAC/FTEAC has put in place regarding

The precise scope of the [fair and equitable treatment] standard is…left to the determination of the

Tribunal which will have to decide whether in all the circumstances the conduct in issue is fair and

equitable or unfair and inequitable.347

6. Canada has Breached its Obligation to Provide Merrill & Ring “Fair

and Equitable Treatment”

a. The Log Export Control Regime is Secretive and Opaque

348. The Log Export Control Regime is administered in a “hush-hush” secretive manner that

does not meet the standards of openness and transparency required by NAFTA Article

1105(1) and that does not enhance respect for the rule of law.

349. One of the most non-transparent aspects of the Log Export Control Regime surrounds the

administration of the Surplus Testing Procedure by TEAC/FTEAC. This process is

enshrouded in secrecy from beginning to end. If Merrill & Ring wants to export its348

logs, it must first offer them for sale to domestic log processors on what is called the Bi-

Weekly List. When inspecting the logs up for sale, log processors are able to tell which

logs belong to which log producer. This enables them to target particular log producers

by placing bids on logs offered up by only some companies, but not others. Merrill &

Ring has been the subject of special targeting on many occasions. 349

350. The ability to target log producers is crucial in enabling log processors to engage in the

illicit practice of “blockmailing”; if it were not for their ability to see which logs belong

to which producer, they would not be able to threaten log producers with “blocking” their

logs from export. In essence, the lack of knowledge creates a lack of legal security for the

log producers. Despite the fact that TEAC/FTEAC is aware of the practice of targeting, it

has never adopted any procedures or protocols to address this problem.350

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advertisers being subject to special targeting by purchasers.”


This is why Canada was unable to produce any responsive documents in response to Merrill & Ring’s Document352

Request #41, Investor’s Schedule of Documents (Tab 85), by which it requested that Canada produce all “documents

since April 1, 1998 evidencing the circumstances in which TEAC/FTEAC allows guests to attend their meetings, and

private forest landowners to make personal presentations on matters of concern to them.” Canada produced only one

document in response. This document, however, was not responsive to the document request.


Canada’s Counter Memorial at FN 633.354

Stutesman Reply Witness Statement, December 12, 2008 at para. 5.355

351. Once the bidding process comes to a close, the next step in the process is for

TEAC/FTEAC to convene in order to determine whether the “block” offers placed on

Merrill & Ring’s logs are at the so-called “fair market value” that is, the artificially

suppressed domestic market value. These meetings are closed to the public, and Merrill

& Ring is unable to attend to present its views about the propriety of any “block” offer it

has received. Although Canada claims that Merrill & Ring can and does make

submissions to TEAC/FTEAC on “block” offers it receives, Canada is mistaken. 351

Merrill & Ring has never been allowed to make oral submissions to TEAC/FTEAC.

TEAC/FTEAC has never made public any guidelines about when guests may attend its

meetings, nor has it otherwise ever made public any indication that log producers might

be able to make oral submissions to it.352

352. Equally unclear is the basis upon which TEAC/FTEAC meetings may be cancelled.

Canada states that TEAC/FTEAC meetings are cancelled “only when there are no offers

to be discussed.” Yet right after making this statement, Canada contradicts itself by353

admitting that a TEAC/FTEAC meeting was in fact cancelled in August 2006 where

“block” offers were in fact to be considered. Some of these “block” offers were on354

Merrill & Ring’s logs. Canada does not deny this meeting was cancelled without355

consultation or prior notice. Such erratic behaviour has introduced uncertainty into the

business environment, since log producers just do not know if and when TEAC/FTEAC

meetings might be suddenly cancelled again.

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#37, Investor’s Schedule of Documents (Tab 86), by which Merrill & Ring requested that Canada produce

“[d]ocuments since April 1, 1998 evidencing the TEAC/FTEAC “rule” that an offer is considered fair if it within 5%

of the current domestic market value of the logs.” Canada was unable to produce any documents in response.


353. In the event that a TEAC/FTEAC meeting is convened as scheduled, not only are log

producers unable to attend to present their views, but they are also unable to ascertain in

any detail the basis upon which TEAC/FTEAC makes its decisions. While it is

understood that TEAC/FTEAC seeks to determine whether any given “block” offer is in

line with the domestic market value of the logs, there is no way of knowing in any detail

the basis upon which this determination is made. What is “fair” to TEAC/FTEAC is

clearly different that what is “fair” to log producers like Merrill & Ring. The most

striking example of this difference in perspective is the general guideline used by

TEAC/FTEAC that as long as an offer is within 5% of the domestic market value of the

logs, that offer is considered “fair”. While 5% may not mean much to TEAC/FTEAC,356

it means a lot to private log producers operating in a very competitive market. Even357

though Canada insists that these determinations are based on “objective” data, they still358

come down to “subjective” judgments. In any event, regardless of the fairness of this

approach, Canada has never documented or otherwise informed log producers about this

‘5% “fairness” rule’. As a result, Canada’s unsupported assertion that the criteria by359

which TEAC/FTEAC decisions are made are “concrete, reasonable and well defined”360

is simply untrue.

354. Concerns over the fairness of TEAC/FTEAC determinations are exacerbated by the

secretive way in which TEAC/FTEAC members are appointed. Although Canada admits

that it creates a shortlist of potential candidates, and forwards names to DFAIT for final

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Canada produced no documents in response to Merrill & Ring’s Document Request #27, Investor’s Schedule of362

Documents (Tab 87), which asked for “[d]ocuments related to the appointments for all members of TEAC or of

FTEAC who have served on such bodies since December 26, 2003.”

This is why Canada was unable to produce any documents dated prior to the initiation of this claim in response to363

Merrill & Ring’s Document Request #31, Investor’s Schedule of Documents (Tab 88), which asked for “[d]ocuments

evidencing invitations extended to private landowners to become members of TEAC or of FTEAC.”


#30, Investor’s Schedule of Documents (Tab 89), which asked for “[d]ocuments evidencing the fact that potential

candidates for appointment to TEAC or to FTEAC were not considered on account of conflict of interest.”


#32, Investor’s Schedule of Documents (Tab 90), which asked for “[d]ocuments evidencing the existence of

consultations between TEAC or FTEAC, or with agents or emissaries on behalf of these bodies, with private forest

landowners about the appointment of committee members.”


#33, Investor’s Schedule of Documents (Tabs 91 92), which asked for “[d]ocuments since April 1, 19989 evidencing

any TEAC/FTEAC guidelines addressing conflict of interest of members in any manner.”

approval, for some reason it was unable to produce any documents relating to the361

appointment process.362

355. In any event, there are simply no established criteria for the appointment of

TEAC/FTEAC members. This is why the membership of TEAC/FTEAC is so slanted to

favour the interests of log processors, as opposed to log producers. Prior to the initiation

of this NAFTA claim, TEAC/FTEAC had never invited a private landowner to become a

member. The lack of criteria for selecting TEAC/FTEAC members is also the reason363

why no proposed member of TEAC/FTEAC has ever been excluded on the basis of

conflict of interest, and why TEAC/FTEAC has never so much as consulted with364

private landowners about the appointment of committee members.365

356. This is all the more concerning given the fact that TEAC/FTEAC has no guidelines on

conflict of interest. Yet despite this lack of guidelines, curiously the only potential366

candidate ever to be disqualified on this basis was the one private forest landowner

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This is evident from the fact that Canada produced the same and only one document in response to both367

Merrill & Ring’s Document Requests #30 and #31. Document Request #30 asked for “[d]ocuments evidencing the

fact that potential candidates for appointment to TEAC or to FTEAC were not considered on account of conflict of

interest.” Investor’s Schedule of Documents (Tab 89). Document Request #31 asked for “[d]ocuments evidencing

invitations extended to private landowners to become members of TEAC or of FTEAC.” Investor’s Schedule of

Documents (Tab 88).


See Timberwest v. Canada, Transcript of May 29, 2006, at p.606, lines 18 19, Investor’s Schedule of Documents369

(Tab 93), where the Chairman of TEAC/FTEAC states that the Minutes of TEAC/FTEAC meetings are not made

public.


Stutesman Reply Witness Statement, December 12, 2008 at Section III.371

Canada apparently invited after the initiation of this claim. This complete lack of367

documentation stands in stark contrast to Canada’s unsupported assertion that

“TEAC/FTEAC has adopted procedural rules to deal effectively with potential conflict of

interest.”368

357. All this secrecy surrounding the TEAC/FTEAC membership and process is compounded

by the fact that the Minutes of TEAC/FTEAC meetings are not made publically

available. As a result, there is no way to verify on what basis decisions are made. 369

There is also no way to verify whether conflicted members actually excuse themselves

from the meetings at the appropriate times. In short, there is simply no transparency, and

therefore no accountability.

358. Once TEAC/FTEAC determines that an offer is “fair”, its determination is almost

invariably given final approval by DFAIT. While it is true that Merrill & Ring may take

it upon itself to lobby the Minister of Foreign Affairs to disregard FTEAC

determinations, in reality the Minister rarely does so. While it is true that the Minister370

of Foreign Affairs has, on occasion, overturned FTEAC recommendations in the past, it is

a gross exaggeration to suggest, as Canada does, that such occurrences are “not

uncommon”. On the contrary, they are quite rare. The reason for this is that it is clear

that the only situations in which the Minister will overturn an FTEAC recommendation

are when the recommendation is grossly and patently unfair, and where this can be

positively proved. These are the only circumstances where it makes any sense for371

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This is why Canada was unable to produce any documents that had been made public in response to Merrill &376

Ring’s Document Request #25, Investor’s Schedule of Documents (Tabs 94 99), which asked for “[d]ocuments

evidencing the “other relevant factors” DFAIT is required to consider in addition to recommendations it receives

from TEAC/FTEAC since April 1, 1998.” Every document Canada produced was an internal government document

marked “Internal” or “Confidential”.

Canada’s Memorial at para. 602.377



Merrill & Ring to put in the effort and resources required to mount a challenge to an

FTEAC determination. This is not to say that it is only on rare occasions that FTEAC372

makes an unfair determination. Rather, it is to say that the situations where FTEAC

determinations are so patently unfair as to be both impossible to ignore, on the one hand,

and, on the other, possible to prove, that Merrill & Ring will challenge the decision. 373

Ultimately, the whole process is so opaque that it is only on rare occasions that Merrill &

Ring will be able to mount any challenge to unfair FTEAC determinations that, under the

circumstances, has a reasonable chance of success.374

359. Nonetheless, should Merrill & Ring in fact decide to challenge an FTEAC decision, it is

true that DFAIT may examine what it calls “other relevant factors” that FTEAC does not

consider. However, log producers do not know what these “other relevant factors” are. 375

Canada has never made any information public on this matter. Instead, it baldly states376

that these “other relevant factors” are “well-known to participants in the log industry,”377

and provides no evidence in support. Without knowing what these so-called “other

relevant factors” are, should Merrill & Ring decide that it even has a chance at

successfully challenging an FTEAC determination, it is simply unable to know for certain

how to make its case. Any challenge it mounts is necessarily based on experience and378

guesswork.379

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#22, Investor’s Schedule of Documents (Tabs 100 101), which asked for “[d]ocuments evidencing the procedures

and practices, other than the Terms of Reference, that apply to TEAC or FTEAC.”


Korecky Affidavit, May 10, 2008 at para. 106.383


Notice 102, section 1.5, Investor’s Schedule of Documents (Tab 22); BC Export Procedures, section 3.14,385

Investor’s Schedule of Documents (Tab 31).

360. Such “long shot” challenges are not even available to address unfair “block” offers made

on Merrill & Ring’s provincial logs; they are only available for challenging “block” offers

approved by FTEAC, not TEAC. Determinations made by TEAC on “block” offers on380

provincial logs are equally secretive as FTEAC decisions, but even more final.

361. Canada knows that the Log Export Control Regime affords log producers unfair

opportunities to abuse the system. This is why TEAC/FTEAC may decide to take

disciplinary action in the event a complaint is made. Yet even the disciplinary measures

TEAC/FTEAC might take are befogged by secrecy, and there are no procedures or

practices in place on the matter. TEAC/FTEAC will not even let the victim of an abuse381

know if, when, or on what basis it might take corrective measures. By way of382

explanation, Canada’s representative on FTEAC, Judy Korecky, says that making public

some disciplinary actions taken against certain companies would be prejudicial to those

companies. As is clear from Merrill & Ring’s experience, however, not releasing the383

information is prejudicial to it. Clearly, TEAC/FTEAC’s unwritten disciplinary384

policies err on the side of protecting offending log processors rather than victims of this

unfair conduct.

362. Beyond the TEAC/FTEAC process, Notice 102 and the BC Export Procedures

themselves give rise to uncertain and opaque market conditions. For example, both

Notice 102 and the BC Export Procedures require Merrill & Ring to follow “normal

market practices” in order for their logs to be able to qualify for export. However,385

nowhere does either document provide any hint as to what “normal market practices”

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Canada was unable to produce any responsive documents in response to Merrill & Ring’s Document Request #18,387

which asked for “[d]ocuments evidencing the meaning of “normal” market practices for the purposes of Notice 102

since January 1, 1998.”


Notice 102, section 1.4, Investor’s Schedule of Documents (Tab 22).389


This can be seen from Canada’s inability to produce any documents in response to Merrill & Ring’s Document391

Request #17, Investor’s Schedule of Documents (Tab 103), which asked for “[d]ocuments evidencing the definition

of the term “remote” as used in Notice 102 having been communicated to private forest landowners in BC since

January 1, 1998.”


actually means. What is “normal” is left to the determination of BCMOF, which does not

specify what it means either. Canada simply denies that there is any problem with this,

and explains that “normal market practices” are specified in a document called the Coast

Domestic Market End Use Sort Descriptions. However, nowhere in this document386

does it state that its contents constitute “normal market practices” for the purposes of

Notice 102 and the BC Export Procedures. Instead of producing evidence that explains

the meaning of “normal market practices” as it was asked to do Canada flatly, and387

without support, simply claims that “Merrill & Ring knows exactly what “normal” market

practices are.”388

363. This notion of Canada’s that market players somehow just ought to know what the rules

of the Log Export Control Regime are can also be seen with respect to the so-called

“remote” advertising rule. This rule requires that log producers may not advertise logs389

in volumes of less than 2,800 m in areas on the BC Coast that are considered3

“remote”. Canada has never made any public announcement to industry players exactly390

what it considers “remote” to mean. Canada has been unable to produce any documents

demonstrating otherwise. All it is able to do is to plainly assert again without391

evidence or support that log exporters do know which areas are considered “remote”. 392

Canada can only cite an obscure policy document from 1986 that described what was

considered “remote” at that time. What Canada underplays is the fact that this policy

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Cook Affidavit, May 7, 2008 at para. 76.394

395


document was released under a previous Log Export Control Regime, some 12 years prior

to Notice 102 and 14 years prior to when the BC Export Procedures came into effect.

Canada cannot and does not deny that it has never made any information public about

what is considered “remote” under the current Log Export Control Regime.

364. Canada itself seems unsure about what it is that “remote” means. Judy Korecky describes

it as describing “areas from which logs must be barged, rather than towed.” This,393

however, is different than the definition offered by John Cook, who states that it “is

roughly defined as any location requiring an inordinate amount of time or cost to access

from the lower mainland log marketplace.” Indeed, it is clear from the very documents394

Canada produced in response to Merrill & Ring’s request for evidence about this “rule”395

365. Still, Canada insists that log exporters somehow just know what is considered “remote”

for the purposes of Notice 102, offering up yet another definition: “any location requiring

excessive travelling time and cost to access from the lower mainland log marketplace.” 396

This is as clear as mud. Just how it is that log producers like Merrill & Ring are

supposed to know what “excessive travelling time and cost” means remains unexplained.

366. Canada also insists that, in any event, its failure to let the industry know what “remote”

means has had no impact on Merrill & Ring, since none of Merrill & Ring’s lands are

considered “remote”. This runs counter to the testimony of Tony Kurucz, who has sworn

that a BCMOF employee and TEAC/FTEAC member assured him that Merrill & Ring’s

lands located in Theodosia are considered “remote”, and logs from that area would have

to be advertised in accordance with the minimum volume requirement as specified in

R-1(b)(ii)

R-1(b)(ii)

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Kurucz Reply Witness Statement, December 14, 2008 at para. 6.397

Canada’s Counter Memorial, para. 636.398

399

Macpherson Expert Statement, December 14, 2008 at para. 9.400


Notice 102. Canada impugns Mr. Kurucz’ statement, pointing to the fact that there is397

no documentary evidence of this exchange. This contradicts Canada’s suggestion that

this is all Merrill & Ring’s fault, since “any potential ambiguity can be clarified by a

simple phone call.” Mr. Kurucz did try to clear up this so-called “ambiguity” with a398

phone call and what he was told was that its Theodosia lands are considered “remote”.

has attested that from the perspective of the market, and in light of the fact

that Canada has never made any information available to the market about what is

considered “remote”, it is entirely plausible that lands located in the Theodosia area

would be considered “remote”. In addition, Mr. McPherson has stated that he too399

considers Theodosia to be “remote”, as well as the majority of Merrill & Ring’s other400

lands. If it is true that Theodosia is not considered “remote”, the blame for the damage

this has caused should not fall on Merrill & Ring; this could have all been avoided if

Canada had ever provided any information to the industry about just what it is that

“remote” actually means.

367. Despite all these examples of secrecy and non-transparency, Canada is still somehow able

to insist without offering any documentary evidence in support that “the regime is

transparent.” In the end, the facts speak for themselves.401

b. The Federal Government is Not Legally Limited from Granting

Standing Exemptions It is a Political Choice

368. The obscurity of the “rules” of the Log Export Control Regime is mirrored in the “shell

game” of governmental authority that animates them. While the federal government has

jurisdictional authority especially with respect to federal logs it simply refuses to

C-1(b)(ii)

C-1(b)(ii)

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Matkin Witness Statement, December 11, 2008 at paras. 6 & 25. 402

Matkin Witness Statement, December 11, 2008 at para. 11. 403


Matkin Witness Statement, December 11, 2008 at para. 13.405



assert its jurisdiction for political reasons. Instead, it simply resiles from the exercise402

of the authority it rightfully has, deferring instead to the political sensitivities of the BC

government.

369. As is clear from the very structure of the Log Export Control Regime, jurisdiction over

BC logs is divided between the provincial government on the one hand, and the federal

government on the other. This jurisdictional split is the result of the division of powers

established by the Canadian Constitution. Under the Canadian Constitution, the BC403

government has jurisdiction over forestry resources, while the federal government has404

authority over all matters relating to trade and commerce, including international trade. 405

When it comes to regulating trade in logs, there is obviously significant overlap between

the two levels of authority. Laws and regulations characterized by such overlap are said

to have a “double aspect”.406

370. To determine whether either level of government has constitutional authority to

exclusively regulate a forestry issue with a “double aspect”, the question is simply this:

what is the essence or, in constitutional parlance, the “pith and substance” of the

regulation in question? This requires scrutiny of the true character of the regulation by

looking at two things: its legislative purpose; and its practical effect. Where the407

analysis suggests that, on balance, the essential purpose and effect of the regulation

relates to an area of provincial authority such as the regulation of forestry resources, then

the regulation is said to properly fall within provincial jurisdiction. By contrast, where

the analysis reveals that, on balance, the purpose and effect of the regulation instead

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See, for example, Canada’s Statement of Defence at para. 34, and Canada’s Counter Memorial at paras. 400 &409

574.

Matkin Witness Statement, December 11, 2008 at paras. 6 & 25. 410

Matkin Witness Statement, December 11, 2008 at paras. 6 & 25.411


relates to an area of federal authority such as the regulation of trade and commerce, then

the regulation is said to fall within federal jurisdiction.408

371. Under the Log Export Control Regime, only the BC government grants standing

exemptions to provincial timber. Canada insists that the federal government does not

have constitutional authority to grant standing exemptions to federal timber. Canada is409

clearly and unequivocably mistaken; it does have constitutional authority to grant

standing exemptions to federal lands. There can be no doubt that Canada knows this. 410

Its refusal to grant standing exemptions is not the result of any legal limitation it is

simply a political decision.411

372. What standing exemptions essentially do is to exempt timber from having to go through

the Surplus Testing Procedure prior to export. To the extent that this relates to the

regulation of forestry resources, it is a matter of provincial jurisdiction. However, to the

extent that it relates to the regulation of trade and commerce, it is a matter of federal

jurisdiction. Clearly, this is one of those issues with a “double aspect”.

373. As a result, it is entirely misleading for Canada to say that the federal government simply

does not have authority to grant standing exemptions. The argument could equally be

made that the BC government lacks jurisdiction over the same matter. Since standing

exemptions go directly to the issue of export, it seems to fit more squarely within a head

of federal power. This is all the more so in light of the fact that the lands in question are

under federal authority to begin with. In truth, both levels of government may or may412

not have authority to grant standing exemptions. Whether a particular regulation is

within or beyond the authority of the federal government is simply a question of what its

essential “pith and substance” is.

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See, for example, Canada’s Counter Memorial at para. 34.415



374. If the federal government were to enact a law or regulation with the essential purpose of

regulating trade in- and export of logs, and with a corresponding practical effect, then that

regulation would clearly fall within its sphere of constitutional authority. If motivated by

the desire to assert its rightful jurisdiction over trade and commerce, there is absolutely

nothing to prevent the federal government from passing legislation that would allow it to

authorize standing exemptions for timber on federal lands in BC.413

c. The Log Export Control Regime Discriminates Against Log

Producers in Favour of Log Processors

375. When Canada speaks of the “forest industry”, and its importance to the Canadian

economy, it is important to be clear about what exactly it is referring to. Canada rightly414

points out that this “industry” can be divided into different sectors. These sectors can415

be roughly broken up into two categories: primary forest products; and secondary forest

products. Primary forest products basically means “logs”. Secondary forest products

essentially means products derived from logs, such as pulp, paper and lumber. Primary

forest products are produced by logging companies like Merrill & Ring. Secondary forest

products are produced by log processors, such as sawmills. Log processors like sawmills

purchase the materials for their products from log producers like Merrill & Ring.

376. Canada points out that the value of BC secondary forest products exports is CDN $32.6

Billion. Canada also highlights the fact that BC log exports amount to a mere fraction416

of that number: CDN $0.407 Billion. The relative importance of these two sectors to417

the BC economy and, therefore, to the BC government is clear.

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419

Testimony of John McCutcheon, TimberWest v. Canada, June 5, 2006, at 783, Investor’s Schedule of Documents420

(Tab 37).

This is why Canada was unable to produce any documents dated prior to the initiation of this claim in response to421

Merrill & Ring’s Document Request #31, Investor’s Schedule of Documents (Tab 88), which asked for “[d]ocuments

evidencing invitations extended to private landowners to become members of TEAC or of FTEAC.”

This is evident from the fact that Canada produced the same and only one document in response to both422

Merrill & Ring’s Document Requests #30 and #31. Document Request #30 asked for “[d]ocuments evidencing the

fact that potential candidates for appointment to TEAC or to FTEAC were not considered on account of conflict of

377. This is why the entire raison d’être of the Log Export Control Regime is to ensure log

processors an adequate supply of low cost logs; simply put, the use of this coercive

regime ensures that log producers keep running, and protects traditional Canadian jobs.

This objective, however, is achieved at the direct expense of log producers, who are

forced to sell their logs in the domestic market at artificially suppressed prices. In418

essence, log producers are forced to subsidize the operations of log processors. The Log

Export Control Regime is being used to indirectly subsidize inefficient mills by providing

domestic mills with cheap, export quality logs. Instead of subsidizing log processors419

directly from the public purse, Canada has opted to subsidize them indirectly from private

pockets. Every time Merrill & Ring is forced to sell its logs in the domestic market at

artificially low prices, their loss is a log processor’s gain. For every Canadian job that is

protected, there is a foreign investor that is paying for it. In short, the Log Export Control

Regime is inherently discriminatory: it protects Canadian jobs at the expense of foreign

investors. This is fundamentally unjust and unfair.

378. The discriminatory nature of the Log Export Control Regime manifests itself in all sorts

of ways. For example, instead of being comprised of a membership from a rounded

cross-section of the entire forest industry, TEAC/FTEAC excludes private forest

landowners from membership. There has never been anyone on TEAC/FTEAC with any

significant private federal landholdings. In fact, prior to the initiation of this NAFTA420

claim, TEAC/FTEAC had never so much as invited a federal landowner to become a

member. Moreover, the only potential candidate ever to be disqualified from421

consideration from TEAC/FTEAC is the one private forest landowner Canada apparently

invited after the initiation of this claim.422

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interest.” Investor’s Schedule of Documents (Tab 89). Document Request #31 asked for “[d]ocuments evidencing

invitations extended to private landowners to become members of TEAC or of FTEAC.” Investor’s Schedule of

Documents (Tab 88).


424

425

426

379. The only possible explanation for the exclusion of private forest landowners from

TEAC/FTEAC is as a former Chair of TEAC has testified under oath that

TEAC/FTEAC determines what is “fair” in the context of the overriding goal that log

processors have an adequate supply of logs. Clearly no log producer would ever view423

the unwritten TEAC/FTEAC rule that off ers 5% below the already suppressed domestic

market price as “fair”. That tacit rule is in-and-of-itself discriminatory and unfair.

Canadian jobs are protected foreign investors pay.

380. The biased composition of TEAC/FTEAC may also explain why TEAC/FTEAC is so

likely to reject export applications brought before it. Stuart Macpherson, the Executive

Director of the Private Managed Land Forest Council, did an analytic review of

TEAC/FTEAC minutes. As Mr. Macpherson’s research shows, of all the export

applications it was required to scrutinize between April 1998 and May 2008,

of all applications put before it. And compared to the424

failure rate for federal export applications, TEAC/FTEAC rejected an

of Merrill & Ring’s export applications for its federal logs. In this425

period, TEAC/FTEAC repeatedly

381. TEAC/FTEAC’s concern for the interests of log processors at the expense of log

producers can also be seen in the way it disciplines abusive practices. As we have seen,

when it is clear that a log processor has blatantly abused the system, and the log producer

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has brought the matter to their attention, TEAC/FTEAC has to investigate the matter.

Should it decide to take disciplinary action against the abuser, however, it will not even

let the victim know if, when or on what basis it will take corrective measures. Judy

Korecky explains that making public disciplinary actions taken against any particular log

processor would be prejudicial to it. As is clear from Merrill & Ring’s experience,427

however, not releasing the information is prejudicial to it. It is clear where428

TEAC/FTEAC’s priorities lie: in protecting the interests of log processors at the expense

of log producers. Again, Canadian jobs are protected foreign investors pay.

382. Another way in which the Log Export Control Regime is slanted to favour log processors

over log producers can be seen in the sorting and scaling requirements imposed by the

Regime. Cutting, sorting, and scaling requirements are laid out in Notice 102 and the BC

Coast Domestic Market End Use Sort Descriptions. These dictate how Merrill & Ring429

must cut, sort and scale its logs, according to log species, grade, diameter and volume.

These requirements force Merrill & Ring to cut and sort its logs to meet the preferences

of BC log processors. However, Merrill & Ring’s foreign customers prefer their logs to

be sorted and scaled differently. By having to sort and scale its logs in accordance with430

local requirements, Merrill & Ring is forced to incur extra time and cost to produce its

logs. Still, Canada expresses confusion over why Merrill & Ring is complaining about431

this. As Canada puts it, sorting and scaling requirements are, after all, “industry

driven.” It is here, however, that we see clearly what Canada means when it talks about432

the “industry”. As Canada states, “these “requirements” exist simply because sawmills

located in BC prefer certain log dimensions...” This is Merrill & Ring’s point. Again,433

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Cook Affidavit, May 7, 2008 at paras. 79 80.434

Cook Affidavit, May 7, 2008 at para. 82.435

Kurucz Reply Witness Statement, December 14 2008 at Section IV.436


Kurucz Witness Statement, February 11, 2008 at para. 50. 438

Canada succeeds in clarifying for the Tribunal another way in which the Log Export

Control Regime caters to the preferences of domestic log processors at the expense of

foreign log producers.

383. Yet another way in which the Log Export Control Regime discriminates against log

producers in favour of log processors can be seen in the so-called “remoteness” rule.

According to this rule, logs located in “remote” areas may not be advertised for export in

volumes less than 2,800 m . Canada explains that the reason for this rule is to avoid so-3

called “abuse” by log producers who might otherwise advertise “remote” logs in volumes

too small for prospective purchasers to want to bother inspecting them. In any event,434

says Canada:

…log booms can easily be moved from such “remote” locations to other areas where the regime

does not impose any minimum volume requirement. Thus, this minimum volume requirement is

not really an obstacle for a company like Merrill & Ring.435

While it may be true that log booms can be towed from “remote” to “non-remote” areas

to circumvent this unwritten rule, there is nothing “easy” about doing so. Indeed, it does

in fact create all sorts of obstacles for Merrill & Ring. First of all, if Merrill & Ring436

were to advertise “remote” logs, it would have to plan its operations so as to ensure that

there is a minimum volume of 2,800 m . Otherwise, logs would deteriorate as they3 437

waited for other logs of a suitable sort to be cut. Second, in order to tow its logs, Merrill

& Ring has to arrange for a suitable towing company to take its logs to a non-remote

location. This takes time, effort, and money. Third, when towing the logs, Merrill &

Ring faces the risk that the logs could break up and be lost. This is a business risk that438

needs to be factored in to its decisions.

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Kurucz Reply Witness Statement, December 14, 2008 at para 23.439

384. So that log processors can be spared the inconvenience and expense of inspecting logs

forced up for sale from “remote” areas, Merrill & Ring is put to great inconvenience, risk

and expense. Yet again, Merrill & Ring is penalized on a compulsory basis to enable

Canada to provide benefits to preferred Canadian industries.

d. The Log Export Control Regime Discriminates Against Federal

and Coastal Log Producers in Favour of Provincial and Interior

Log Producers

385. In addition to discriminating against log producers in favour of log processors, the Log

Export Control Regime also discriminates between different types of log producers

themselves. Specifically, it discriminates against federal log producers in favour of

provincial log producers. In addition, it also discriminates against log producers on the

BC South Coast in favour of log producers in the BC Interior.

386. The discriminatory treatment between federal and provincial producers is evident in the

rule relating to advertising remote logs. Prior to January 2007, logs from both remote

provincial and federal lands could only be advertised after they had been towed to a non-

remote region. However in January 2007 BCMOF changed the provincial policy to allow

logs from remote provincial lands to be advertised while in transit to their destination

provided the log producer could establish that it knew the destination to which the logs

were being towed. This decision only applied to provincial logs. The ability to advertise439

while towing is advantageous because it reduces the delay in the process and possibly

reduces the period of time logs spend sitting in the water and being exposed to damage.

This difference in treatment between provincial and federal logs is completely arbitrary.

387. This discriminatory treatment is also apparent in matters relating to standing timber

exemptions. Since a log producer with lands covered by a standing exemption knows for

certain that it will be able to export its logs, it is able to line up overseas purchasers ahead

of time, before it even cuts its trees. As a result, the log producer can cut, sort, and scale

its logs specifically to meet its customer’s needs. In addition, because the log are

guaranteed to be exported, the log producer is not subjected to the harassment and

intimidation of “blockmailers”. And finally, once cut the logs in question do not have to

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440

441

442

443

wait to pass the Surplus Testing Procedure, and, as such, are not forced to waste away in

the elements as a result of needless delays.

388. Standing exemptions are only made available to log producers with provincial lands.

Even though log producers with federal lands might be located immediately adjacent to

provincial lands with standing exemptions, growing the exact same types of trees in the

same circumstances, such exemptions are not made available to them.

. First Nation lands are categorized as federal lands. 440

.

389. This discriminatory treatment is also apparent in the issue of standing applications. In

contrast to standing exemptions, standing applications do not exempt timber from the

Surplus Testing Procedure. Instead, they simply allow a log producer to submit its logs to

the Surplus Testing Procedure before they are actually cut. As a result, standing

applications are not quite as valuable as standing exemptions. Nonetheless, they still

allow log producers to avoid having to cut, sort and scale their logs to the preferences of

local mills. They allow log producers to avoid blockmail and log blocking. 441 442

Moreover, standing applications allow log producers to avoid having their logs

deteriorate due to infestation and exposure to the elements while they wait to get through

the Surplus Testing Procedure and obtain export approval. Finally, standing applications

enable log producers to enter into reliable long-term supply contracts, obtaining much

better prices than they could otherwise.443

390. While standing exemptions are only available to provincial landowners, standing

applications, Canada asserts, are only available to log producers in the Interior. That is,

standing applications are available to both federal and provincial timber, provided it is

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444


Testimony of John McCutcheon, TimberWest v. Canada, (June 5, 2006) at p.753, Investor’s Schedule of446

Documents (Tab 37).

located in the Interior, not on the Coast. The facts, demonstrate otherwise.

.444

391. Because Merrill & Ring is primarily a federal landholder with lands located exclusively

on the BC South Coast, neither standing exemptions nor standing applications are

available to it. This clearly demonstrates that the Log Export Control Regime

discriminates against federal landholders on the BC south-coast such as Merrill & Ring in

favour of provincial landholders elsewhere in the province.

e. The Log Export Control Regime Discriminates Against Provincial

Log Producers

392. The Log Export Control Regime also discriminates against provincial log producers.

Only exporters of provincial logs are required to pay a fee-in-lieu upon export of their

logs, and only provincial log exporters are prohibited from exporting cedar and other high

grade species. The only reason for the differential treatment is that the logs in question

come from provincial timbermark lands.

f. The Log Export Control Regime Fosters the Illicit Practice of

“Blockmailing”

393. Another way in which the Log Export Control Regime discriminates against log

producers in favour of log processors is by encouraging and condoning the illicit practice

of “blockmailing”.

394. In essence, “blockmail” occurs when a log processor approaches a log producer and

threatens to “block” its log exports with a non bona fide offer unless the log producer

enters into a side deal to sell it other logs at a discount price. This extortive practice is445

so rampant that it is simply understood as accepted market practice, or, as a former Chair

of TEAC put it, just “part of the game.” Smaller log producers are particularly446

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Kurucz Witness Statement, February 11, 2008 at para 70, 447



This is why Canada was unable to produce any documents indicating its policy on blockmailing in response to450

Merrill & Ring’s Document Request #45, Investor’s Schedule of Documents (Tabs 107 117). which asked for

“[d]ocumenst since April 1, 1998 evidencing the practice of “log blocking,” “blockmailing” or non bona fide

offers…including government responses…and government actions to address these practices.”

451

Stutesman Witness Statement, December 12, 2008 at para 15.452

vulnerable to blockmailing because they do not have the clout necessary to fend off

blockmailers. 447

395. Canada denies that it is responsible for blockmail, claiming that it takes all necessary

measures to prevent and discipline this illicit practice. This is a blind denial of reality. 448

Though it may be that Canada does not engage in the practice of blockmail itself, it is

wrong to say that it is not in fact responsible for this practice; were it not for the Log

Export Control Regime a system that Canada cannot deny it is responsible for

blockmail would not be possible at all. That is, while Canada may not be the actual party

that does the blockmail, it is directly responsible for enabling those who do. Canada’s

denial is analogous to the claims of a mastermind claiming he is innocent, since he was

not the one who actually carried out the crime.

396. Canada claims that its “policy is nevertheless to do all it can to prevent blockmailing.” 449

This is also false. Not only has Canada failed to produce any evidence of such a policy,450

but there are also many basic things Canada could do to discourage blockmail, if that is

truly what it wanted to do. There is no mechanism to ensure that anyone who blocks logs

needs these logs nor even to ensure that these logs are used by the blockmailer. This451

situation is made worse as blockmailers are not required to purchase the logs they have

blocked, even after they have been custom cut to the blockmailers’ needs. Another452

obvious way to discourage blockmail would be simply to impose fines upon

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453

454

The documents produced by Canada in response to Merrill & Ring’s Document Request #45, Investor’s Schedule455

of Documents (Tabs 107 117), which asked for documents evidencing the practise of “blockmailing” including

government actions and responses to address these complaints, do not show that “blockmailers” were, in fact,

penalized for “blockmailing”.

Notice 102 at para. 1.2, Investor’s Schedule of Documents (Tab 22); Export Import Permits Act at s.3(e),456

Investor’s Schedule of Documents (Tab 19).


#11, Investor’s Schedule of Documents (Tab 118). which asked for “[d]ocuments evidencing any shortage of logs

anywhere in Canada related to (a) the needs of national defence; or (b) log supplies for domestic sawmills.”

blockmailers, yet Canada does not do so. A further possibility would be for Canada to453

penalize blockmailers by preventing them from placing offers on export applications for a

certain period of time again, Canada does not do so. Other options abound; yet454

evidence that Canada does anything to prevent blockmailing is sparse.455

397. It is important to remember that the stated purpose of the Log Export Control Regime is

“to ensure that there is an adequate supply of [logs] in Canada for defence or other

needs.” Yet there is not now, nor has there ever been, a shortage of supply of logs in456

Canada, let alone BC, with respect to either the needs of the military or of sawmills. 457

As such, there is no logical connection between the Log Export Control Regime and its

stated purpose. The real and unstated purpose of the Regime is to ensure a low cost

supply of logs for log processors in BC. In light of this disconnect, if Canada’s policy

were truly to do all it can to prevent blockmail albeit within the confines of achieving

its stated policy objectives it would simply abolish the Log Export Control Regime

altogether. Instead, Canada allows this ineffective an outdated policy to carry on, in full

knowledge that it is ”458R-1(b)(ii)

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g. The Log Export Control Regime Creates an Unstable Business

Environment

398. In light of all the foregoing, it is clear that the Log Export Control Regime creates an

unstable business environment. Merrill & Ring has already presented its arguments in its

Memorial as to why this is the case. The BC Minister of Forests has also conceded that459

.460

399. Apart from denying that it has any duty to uphold a stable business environment under

NAFTA Article 1105(1), Canada’s response is simply to deny that the business

environment is unstable. Canada is unable to address the substance of Merrill & Ring’s

assertions because it has no effective way of doing so. Instead of addressing the issues,

Canada tries to argue that Merrill & Ring is only minimally impacted by the Log Export

Control Regime.461

400. Canada’s argument is feeble and makes no sense. In the first place, Canada’s assertion

that Merrill & Ring is only minimally impacted by the Log Export Control Regime could

not be farther from the truth. Canada misconstrues Merrill & Ring’s claim by focusing

only on the logs that are successfully blocked. This is but one aspect of the claim.

Merrill & Ring has gone to great lengths to describe in detail how the Log Export Control

Regime affects every single aspect of its operations, from planning to harvest to sales.

This detailed description has clearly fallen on deaf ears with Canada.

401. In any event, the scale of the impact of the Log Export Control Regime on Merrill &

Ring’s operations is entirely immaterial. It would not matter if the Log Export Control

Regime cost Merrill & Ring $100 or $100 Million. If Canada has failed to respect its

obligations under NAFTA Article 1105(1), and Merrill & Ring has suffered damage as a

result, Canada is required to compensate Merrill & Ring for that damage. Consequently,

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we respectfully request that the Tribunal find that Canada has breached its obligations

under NAFTA Article 1105(1).

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297 305 and 363 367

.


Of course, Merrill and Ring agrees with Prof. Howse who underscores that the interpretive approach taken by this464

Tribunal must also take into account the objectives, policies and rules of the NAFTA as set out in NAFTA Article

102. See the Legal Opinion of Prof. Robert Howse at paras. 5 11.

V. NAFTA ARTICLE 1106: PERFORMANCE REQUIREMENTS

402. The NAFTA contains specific and carefully drafted rules to prohibit the imposition of

performance requirements upon foreign investors. Under NAFTA Article 1106, the

NAFTA Parties agreed not only to prohibit these industrial policy measures against

investors from each of the three NAFTA Parties, but they actually agreed to ban these

performance requirements completely, against investors from any country in the world. 462

403. The Log Control Export Regime fails to meet Canada’s obligations under NAFTA

Article 1106 as they impose:

a) The requirement to cut and sort timber from their federally regulated


b) The requirement to scale all timber rafts metrically even when such scaling

is unnecessary; and

c) The requirement to follow the additional rules for Merrill & Ring

properties located in the remote Coastal region.

404. Canada has framed its arguments on NAFTA Article 1106(1) around the generally

accepted principles of treaty interpretation laid out in Articles 31 and 32 of the Vienna

Convention. Merrill & Ring supports following this approach as well.463 464

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1. The Ordinary Meaning of NAFTA Article 1106(1) Supports Merrill &

Ring’s Claim

405. The first step in treaty interpretation is to discern the “ordinary meaning to be given to the

terms of the treaty”. The terms of NAFTA Article 1106(1) read, in relevant part, as

follows:

No party may impose or enforce any of the following requirements, or enforce any commitment or

undertaking, in connection with the establishment, acquisition, expansion, management, conduct or

operation of an investment of an investor of a Party or of a non Party in its territory:

(a) to export a given level or percentage of goods or services;

(c) to purchase, use or accord a preference to goods produced or services provided

in its territory, or to purchase goods or services from persons in its territory;

(e) to restrict sales of goods or services in its territory that such investment produces

or provides by relating such sales in any way to the volume or value of its

exports or foreign exchange earnings.

406. The most fundamental aspect of NAFTA Article 1106(1) is that Canada “impose or

enforce” a “requirement” on Merrill & Ring. Canada states that the essential meaning

here is one that “imports the notion of compulsion.” Merrill & Ring agrees.465

407. Canada further recognizes that consistent with the ordinary meaning of NAFTA Article

1106(1) the measures complained of must be “in connection with the establishment,

acquisition, expansion, management, conduct or operation of an investment”. Again,466

Merrill & Ring agrees.

408. Canada then goes on to claim that none of the measures at issue in this case meet these

requirements. In particular, Canada claims that log producers like Merrill & Ring are467

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“free to sell their logs on both the domestic and international market.” This is where468

the disputing parties disagree. Canada seems to have a most unusual understanding of the

word “freedom”. This can be clearly seen on the facts of this case, which provide a

useful way to view the ordinary meanings of the terms contained in NAFTA Article

1106(1).

a. Canada Compels Merrill & Ring to Export a Given Level of Goods

409. Merrill & Ring argues that Canada compels it to export a given level of goods, in

violation of NAFTA Article 1106(1)(a). There are two key aspects to Merrill & Ring’s469

argument here. The first hinges on what it is that constitutes a “good”. The second turns

on what it is that constitutes a “given level”.

410. The NAFTA defines what is meant by the term “goods” in its general definitions section

in NAFTA Article 201. It defines a good as:

domestic products as these are understood in the General Agreement on Tariffs and Trade or such

goods as the Parties may agree, and include originating goods of that Party.

411. The Expert Report of Darrell Pearson, submitted by Merrill & Ring with its Memorial,

considered whether the harvesting of logs from trees constituted an originating good from

Canada. Mr. Pearson, a Canadian customs law expert, concluded that:

7. Accordingly, live trees grown within the NAFTA territory, and in particular in this case in

British Columbia and classifiable under the Canadian Customs Tariff Schedule Chapter 6

are considered to be NAFTA originating.

8. The live trees grown in Canada are harvested and converted / processed in Canada as you

describe. Such growth, harvesting and processing constitutes “production” in accordance

with the NAFTA Rules of Origin Regulations, Part I, Definition and Interpretation:

“production”:

... means growing, mining, harvesting, fishing, trapping, hunting, manufacturing,

processing or assembling a good; (production). (emphasis added).

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Expert Report of Darrell Pearson, February 4, 2008. See also Investor’s Memorial at para. 365(a).470

See Canada’s Counter Memorial at para. 707, where it refers to Merrill & Ring’s logs as “goods”.471

Oxford English Dictionary, 2 Ed., Volume VI, at p.674.472 nd

Investor’s Memorial at para. 364(a).473


9. In summary, the live trees grown in Canada (ans specifically in British Columbia) qualify

as goods which originate in accordance with the NAFTA Rules of Origin. The

application of the NAFTA Rules of Origin Regulations, Definitions and Interpretation,

make clear that each of growing, or harvesting or conversion (ie. Processing ) of live trees

into logs constitutes “production”. (The processed logs also “originate” in accordandce

with the NAFTA Rules of Origin.).470

Since the harvesting of trees is a production process and since the log (the result of the

harvesting) is thus an originating good, then Merrill & Ring’s logs must constitute a good

as defined by NAFTA Article 201.

412. Canada has not challenged Mr. Pearson’s reasoning and even admits that Merrill &

Ring’s logs constitute “goods”.471

413. This understanding of what it is that constitutes a “good” is supported by the Oxford

English Dictionary, which defines “goods” as “[s]aleable commodities, merchandise,

wares...” Since Merrill & Ring produces and exports all sorts of different log products472

all of which are saleable commodities it naturally follows that it also exports all sorts

of different “goods”.

414. It is straightforward to see how Canada compels Merrill & Ring to export a “given level”

of goods. As Merrill & Ring has pointed out, the “remoteness” rule requires it to

advertise for export its logs in remote areas in minimum volumes of 2,800 m and3

maximum volumes of 15,000 m . These minimum and maximum volumes clearly3 473

constitute “given levels” of these goods.

415. Canada has argued that this requirement does not have any impact on the level of goods

exported, but rather only concerns the advertisement of logs. Canada ignores the fact474

that these advertising volume requirements are a precondition for export approval. If

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Canada’s Counter Memorial at para. 707. Similar wording also appears at para. 711.475



Merrill & Ring advertises its goods in volumes outside of these given levels, it cannot

export them. Moreover, if Merrill & Ring actually gains export approval for its remote

logs, it cannot export any other volume than the given level for which it was compelled to

advertise.

416. Canada further argues that this volume requirement does not limit Merrill & Ring’s

“overall volume of exports from remote areas,” and that the requirement “has nothing to

do with capacity to export.” In so doing, Canada strays far wide of the wording of475

NAFTA Article 1106(1)(a), which does not speak to “overall volumes” or “capacity to

export.” What NAFTA Article 1106(1)(a) does say is that it is impermissible for Canada

to require Merrill & Ring to export a “given level” of “goods”. As the facts of this case

demonstrate, this is exactly what the volume requirements in the “remoteness rule” do.

b. Canada Compels Merrill & Ring to Accord a Preference to Goods

Produced in Its Territory

417. Canada compels Merrill & Ring to accord a preference to goods produced in Canada in

violation of NAFTA Article 1106(1)(c). Just as with NAFTA Article 1106(1)(a), there476

are two key aspects to this requirement. Again, just as with NAFTA Article 1106(1)(a),

the first hinges on what it is that constitutes a “good”. The second, however, turns on

what it is to “accord a preference”. Since the disputing parties already agree that Merrill

& Ring produces “goods”, we only need to look here to see if Canada requires Merrill &

Ring to “accord a preference” to “goods produced and services provided” in Canada.

418. Merrill & Ring argues that since it is required to cut, sort, and scale its logs in accordance

with the specifications laid out in the Coast Domestic Market End Use Sort Description,

it is required to produce certain types of goods. Merrill & Ring further argues that the477

requirement to package its logs in accordance with the volume requirements of the

“remoteness rule” also compel it to produce certain types of goods, since an inherent

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See, for example, Canada’s Counter Memorial at paras. 42 43, 46 47, 328, 379, and 381.481



aspect of the goods it produces involves raft size. As a result, not only is Merrill &478

Ring required to accord a preference to such goods, but it is actually required to produce

them.

419. Canada says that Merrill & Ring’s claim here is “illogical”, and argues that absent the479

requirements to cut, sort and scale its logs in particular ways, Merrill & Ring would still

be producing goods of the exact same nature. From this statement, it is apparent that480

Canada views all logs as indistinguishable. This stands in stark contrast to Canada’s

strained efforts in the context of NAFTA Article 1102 to suggest that logs produced in

the BC Interior are so different from logs produced on the BC Coast.481

420. It is clear that Canada has simply tried to ignore Merrill & Ring’s position that logs of

different lengths, grades, sorts and scales all constitute different goods. Canada has also

ignored the fact that Merrill & Ring would be producing different types of goods if it

were not required to conform to the Coast Domestic Market End Use Sort Descriptions.

Instead of addressing Merrill & Ring’s arguments head-on, Canada simply ignores them.

c. Canada Compels Merrill & Ring to Accord a Preference to

Services Provided in Its Territory

421. Merrill & Ring is also required to accord a preference to services provided in Canada, in

violation of NAFTA Article 1106(1)(c). Specifically, Merrill & Ring points out that if482

it were not required to cut, sort, and scale its logs in particular ways before being able to

export its logs, it would not have to hire the services in Canada of those who perform

these tasks. Merrill & Ring further argues that it is required to hire the services of483

those who retrieve their logs when they break up while awaiting the Surplus Testing

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Kurucz Reply Witness Statement, December 14, 2008 at paras. 21 22.485





Procedure to run its course. And, in light of the extra towing Merrill & Ring is484

required to do as a result of the “remoteness rule”, it is also required to hire extra485

towing services.

422. Canada says that these arguments “border on the ridiculous”, and denies that any of486

these are even requirements. In making this denial, Canada ignores Merrill & Ring’s487

evidence about cutting, sorting and scaling. However, Canada does at least admit that

“[l]og producers under the provincial regime must also hire the services of recovery

providers”. Yet Canada offers no explanation as to how this shows that there is no488

requirement. Indeed, by pointing out that Canada’s compulsory rules apply to both

provincial and federal log producers, Canada seems to implicitly admit that they are

requirements.

423. Canada states that it does not require Merrill & Ring to hire Canadian workers. This is489

the centrepiece of Canada’s defence. With this argument, however, Canada again strays

far from the express wording of the provision. NAFTA Article 1106(1)(c) forbids

Canada from requiring Merrill & Ring to “accord a preference to...services provided in its

territory.” It does not say that Canada is forbidden from requiring Merrill & Ring to “hire

Canadian workers”. Thus, Canada is correct that it does not require Merrill & Ring to

hire Canadian workers but this is irrelevant. What Canada does is require Merrill &

Ring to “accord a preference...to services provided in its territory”, irrespective of the

nationality of the service providers. The issue is not who provides the service, but rather

where they provide it.

424. While Merrill & Ring must necessarily tow its logs to some extent in Canadian waters,

there is nothing natural about the fact that it is required to hire the services of towing

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Investor’s Memorial at paras. 367(a) & 367(b).491


contractors to a greater extent than it otherwise would. In a related way, while it is true

that Merrill & Ring is naturally subject to the risk of having its booms break up in

Canadian waters, there is nothing natural about being compelled to assume more risk than

it needs to.

425. Finally, while it is undeniable that Merrill & Ring’s trees must be cut down in Canada,

there are no other natural limitations on where Merrill & Ring has to cut up, and

otherwise sort and scale its logs. Yet because of the Log Export Control Regime, Canada

does require Merrill & Ring to conduct all these activities in its territory. As a result,

Canada not only requires Merrill & Ring to “accord a preference” to services provided in

its territory, it actually requires Merrill & Ring to hire services that are provided in its

territory full stop.

d. Canada Compels Merrill & Ring to Restrict Sales in Its Territory

by Relating Them to the Volume of Its Exports

426. Merrill & Ring further argues that Canada requires it to restrict the sale of its logs by

relating their sale to the volume of its exports, in violation of NAFTA Article

1106(1)(e). Specifically, Merrill & Ring argues that because Canada requires it to490

advertise its “remote” logs in minimum volumes of 2,800 m and maximum volumes of3

15,000 m , and because these volume requirements are a precondition for obtaining3

export approval, these volume restrictions are inextricably related to the volume of

Merrill & Ring’s exports.491

427. Canada has not developed any meaningful counter-argument on this point. Instead,

Canada flatly asserts that these volume requirements do not restrict the sale of Merrill &

Ring’s logs in Canada. Canada provides absolutely no reasoning to support this492

assertion it just says it.

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428. It is difficult to understand how it is Canada thinks that the volume restrictions on

advertisements from “remote” lands do not restrict the sale of logs in Canada. If Merrill

& Ring wants to export these logs, it is required to advertise them in packages no smaller

than 2,800 m and no larger than 15,000 m . If a log processor blocks these logs Merrill3 3

& Ring is required to sell them on the domestic market. Because in such a situation the

logs are already packaged according to the volume restrictions of the “remoteness rule”,

the terms of this sale of logs in Canada are restricted. And since this volume restriction is

imposed only for logs that are advertised for export, it is necessarily related to the volume

of exports. These requirements are inconsistent with Canada’s NAFTA obligation in

NAFTA Article 1106(1)(e).

e. Canada’s Measures Are in Connection with the Management of

Merrill & Ring’s Investment in Canada

429. Canada has already agreed that Merrill & Ring’s timber and logs constitute “investments”

for the purposes of NAFTA Article 1139(g). All the foregoing requirements impact the493

way Merrill & Ring either cuts, sorts, scales, tows, recovers, and advertises its logs. In

short, they all impact the way Merrill & Ring manages its investments in Canada. As

such, there can be no doubt that all these requirements meet the condition of any NAFTA

Article 1106(1) claim that the requirement be “in connection with the establishment,

acquisition, expansion, management, conduct or operation of an investment.”

2. The Context of NAFTA Article 1106(1) Supports Merrill & Ring’s

Claim

430. Although it is clear that Merrill & Ring’s arguments satisfy the ordinary meaning of the

words contained in NAFTA Articles 1106(1)(a), 1106(1)(c), and 1106(1)(e) on their face,

it is equally clear that these arguments also match the meaning of these terms in their

context.

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Canada’s Counter Memorial paras. 694 701.496

431. Canada places heavy reliance on NAFTA Article 1106(5) to suggest that Article 1106(1)

must be read narrowly. NAFTA Article 1106(5) reads as follows:494

Paragraphs 1 and 3 do not apply to any requirement other than the requirements set out

in those paragraphs.

432. From this it is apparent that NAFTA Article 1106(5) does not say anything to the effect

that NAFTA Article 1106(1) must be interpreted narrowly. Rather, it merely emphasizes

that the list of requirements enumerated under NAFTA Article 1106(1) is closed, not

open ended.

433. Merrill & Ring is not advancing any argument that expands the list of requirements

contained in NAFTA Article 1106(1). Rather, Merrill & Ring is only advancing

arguments under NAFTA Article 1106(1)(a), 1106(1)(c), and 1106(1)(e). Moreover,

there is nothing expansive about the arguments Merrill & Ring is advancing; they all fit

squarely within the wording of each of these provisions. The overall context of NAFTA

Article 1106 does nothing to alter this.

3. The Object and Purpose of the NAFTA Supports Merrill & Ring’s

Claim

434. Canada also points out that “the objective of prohibiting performance requirements is to

prevent NAFTA countries from distorting investment decisions in their favour.” 495

Merrill & Ring agrees. Everything about the Log Export Control Regime is designed to

encourage the domestic manufacturing of logs something that clearly distorts Merrill &

Ring’s decisions in Canada’s favour.

435. Despite this admission, Canada suggests that the object and purpose of NAFTA Article

1106(1) does not fit with the arguments advanced by Merrill & Ring. Although it is the496

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NAFTA Article 102(1)(a).497

only disputing party with full access to the travaux préparatoires of the NAFTA, Canada

offers no evidence in support of its assertion.

436. Canada appears to further its arguments in line with the principles of treaty interpretation

contained in Articles 31 of the Vienna Convention. Canada, however, misunderstands

Article 31.

437. Article 31(1) of the Vienna Convention reads as follows:

A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to

the terms of the treaty in their context and in light of its object and purpose. (emphasis added)

438. As is evident from the express wording of this provision, NAFTA Article 1106(1) is not

to be read in light of its own object and purpose; rather, NAFTA Article 1106(1) is to be

read in light of the object and purpose of the treaty. This is confirmed by the mandatory

interpretive instructions set out in NAFTA Article 102.

439. The objectives of the NAFTA are set out in Article 102. One of these objectives is to

“eliminate barriers to trade in, and facilitate the cross-border movement, of goods and

services between the territories of the parties.” As NAFTA Article 102(2) makes clear,497

NAFTA Article 1106(1) is to be interpreted and applied in light of this objective. There

is nothing about the performance requirements Canada imposes upon Merrill & Ring that

furthers this objective. Accordingly, the objects and purposes of the NAFTA add further

support to Merrill & Ring’s arguments based on the ordinary meaning of NAFTA

Articles 1106(1)(a), 1106(1)(c), and 1106(1)(e).

4. Interpreting NAFTA Article 1106(1) In Accordance with its Plain and

Ordinary Meaning as well as Its Object and Purpose Does Not Lead

to an Absurd Result

440. Canada finally suggests that the arguments advanced by Merrill & Ring give rise to an

absurd result. According to Canada, if the Tribunal were to endorse Merrill & Ring’s

arguments then any border measure or export restriction would result in a violation of

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NAFTA Article 1106(1). Canada does not and cannot develop any reasoned498

argumentation to support this assertion, which is simply untrue.

441. Just as with NAFTA Article 1102, the NAFTA Parties made a number of reservations

and exceptions to the application of NAFTA Article 1106 under Article 1108 and its

associated Annexes. And just as with NAFTA Article 1102, under Article 1108(3) the

NAFTA Parties each listed a number of economic sectors that are exempt from the

application of NAFTA Article 1106 in their respective Schedules to Annex II.

Accordingly, any border measure or export restriction Canada might take that is expressly

exempted by NAFTA Article 1108, or otherwise applied to an economic sector listed in

Canada’s Schedule to Annex II, would not lead to a violation of NAFTA Article 1106.

442. Although Canada did list a large number of economic sectors that were to be exempt

from NAFTA Article 1106 in its Schedule to Annex II, it did not exempt the forestry or

lumber processing sectors. Consequently, Canada agreed when signing the NAFTA that

NAFTA Article 1106 would apply to these sectors.

443. It is clear that there are a large number of situations in which Canadian border measures

could not constitute violations of NAFTA Article 1106. Accepting Merrill & Ring’s

arguments in this claim does nothing to alter Canada’s existing authority to address

border measures.

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306 350 and 368 389.

VI. NAFTA ARTICLE 1110: EXPROPRIATION

1. Overview

444. The question as to whether Canada has violated its obligations to provide compensation

on the taking of acts tantamount to expropriation under NAFTA Article 1110 is really

very simple. While there is a substantial body of law on this issue of expropriation and

regulatory takings, on the facts of this case, most of this law is in fact rather more

distracting than instructive.

445. Simply put, on the facts of this case, it is obvious that Canada has violated its obligations

under NAFTA Article 1110.499

446. Canada agrees with Merrill & Ring on the analytical steps necessary to find

expropriation. Since in the context of expropriation, the only investment at issue is

Merrill & Ring’s interest in selling its logs at fair value on the international market, the

first step is to simply ask whether Merrill & Ring has such an interest.

447. Canada applies an outdated conception of property rights by denying that this Tribunal

has jurisdiction over Merrill & Ring’s intangible investments. This argument is contrary

to the plain meaning of the NAFTA, previous NAFTA decisions and good sense. It is

clear that the intangible rights at issue in this claim are part and parcel of the tangible

rights. This Tribunal should therefore reject these arguments. It has authority to rule on

the tangible and intangible elements of Merrill & Ring’s investment.

448. Canada has taken acts tantamount to the expropriation of property interests owned by

Merrill & Ring, but Canada has not provided Merrill & Ring with fair market value

compensation. The Log Export Control Regime substantially interferes with Merrill &

Ring’s ability to sell its log at fair value on the international market. Canada takes away

value from Merrill & Ring and redistributes it to other private interests in a manner

contrary to the obligations of NAFTA Article 1105.

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449. In particular, the Log Export Control Regime is inconsistent with Canada’s obligation to

provide fair market value compensation upon an act tantamount to expropriation due to:



b) The requirement to cut and sort timber from their federally regulated

properties to “normal market practices”.

c) The requirement to scale all timber rafts metrically even when such scaling

is unnecessary;

d) The ineligibility to submit standing applications and/or obtain standing

exemptions; and,

e) The requirement to remit the fee-in-lieu on provincial rafts that are

exported.

2. The Law of Expropriation: The Analytical Steps

450. NAFTA Article 1110(1) lays out the conditions a NAFTA Party must adhere to in the

event it takes an expropriatory measure against a foreign investor. It sets out the general

rule as follows:

No Party may directly or indirectly nationalize or expropriate an investment of an investor of

another Party in its territory or take a measure tantamount to nationalization or expropriation of

such an investment (“expropriation”) except:

(a) for a public purpose;

(b) on a non discriminatory basis;

(c) in accordance with due process of law and Article 1105(1); and

(d) on payment of compensation in accordance with subparagraphs 2 through 6.

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Where a Party takes an expropriatory measure that is inconsistent with any one of these

four conditions, that Party is in violation of its obligations under NAFTA Article 1110.

451. Merrill & Ring has argued that there are three key determinations this Tribunal must

make to reach a finding that Canada has breached its obligations under NAFTA Article

1110. These determinations are as follows:

i) Merrill & Ring has an investment in Canada as defined by NAFTA Article

1139;

ii) Merrill & Ring’s investment has been expropriated by Canada; and

iii) Merrill & Ring has not received any compensation for this

expropriation.500

452. Canada has also argued that there are three key determinations required to find that it has

breached its obligations under NAFTA Article 1110.

i) Merrill & Ring has an interest capable of being expropriated;

ii) Canada has expropriated that interest; and

iii) The expropriation was unlawful under NAFTA Articles 1110 (1)(a) to

(d).501

453. While the disputing parties approaches to NAFTA Article 1110 analysis may at first

blush seem quite different, in the context of this case they are in fact strikingly similar.

The reasons for this are laid out in sequence as follows:

i) In the context of NAFTA Article 1110, the only investment at issue in this

case is Merrill & Ring’s interest in realizing fair market value on the

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See Supra, Section II.2.b.502

See Canada’s Counter Memorial at para. 727, where it states: “...when an investor demonstrates that it possesses503

interests within the meaning of the definition of “investment” in NAFTA Article 1139...the Tribunal can proceed to

the second step of determining whether such “investments” have been expropriated.”

international market. As Merrill & Ring has already demonstrated, this502

interest is recognized as an investment under NAFTA Article 1139(h).

While Canada may dispute this fact, it does at least admit that if this

interest is recognized as an investment under NAFTA Article 1139, then it

must also be capable of being expropriated. As such, the disputing503

parties actually agree that the real question at this first step is simply

whether Merrill & Ring’s interest in realizing fair market value on the

international market is a recognized investment under NAFTA Article

1139(h).

ii) Both Merrill & Ring and Canada agree that the second step of the analysis

is to determine whether Canada has expropriated Merrill & Ring’s interest

in realizing fair market value for its logs on the international market.

iii) Both Merrill & Ring and Canada agree that the third step of the analysis

requires the Tribunal to determine whether Canada has provided Merrill &

Ring compensation for the expropriation which is required to by

NAFTA Article 1110(1)(d). Canada, however, would also have the

Tribunal examine NAFTA Articles 1110(1)(a) to (c). Since inconsistency

with any one of the requirements listed in NAFTA Articles 1110(1)(a) to

(d) is fatal to Canada’s defence, the failure by Canada to pay Merrill &

Ring compensation under NAFTA Article 1110(d) is determinative.

Merrill & Ring is prepared to restrict the inquiry to this single ground.

Since it is a required element of the inquiry in any event, Canada could not

possibly object. This simply makes the analysis simpler and less

burdensome for both the disputing parties, as well as the Tribunal.

454. To the extent that Canada wishes to consider issues of due process and consistency with

the international law standard of treatment contained in NAFTA Article 1105, the

Investor incorporates its arguments set out in Section IV of this Reply.

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See Supra, Section II.2.b.504

Pope & Talbot, Interim Award at para. 96 [emphasis added], Investor’s Book of Authorities (Tab 72).505

455. Since the analytical approaches advanced by Merrill & Ring and Canada are essentially

the same, we shall now proceed to follow this framework to demonstrate that Canada has

indeed violated its obligations under NAFTA Article 1110.

3. Merrill & Ring’s Investment Includes an Interest in Realizing Fair

Market Value for its logs on the International Market

456. At the heart of the arguments made so far by either disputing party on NAFTA Article

1110 lies one simple threshold question: is Merrill & Ring’s interest in realizing fair

market value for its logs on the international market recognized as an investment under

NAFTA Article 1139(h)?

457. To help it answer this question, we refer the Tribunal back to our arguments on why it

does have jurisdiction ratione materiae. In reviewing that section, the Tribunal shall504

clearly see that Merrill & Ring’s interest in realizing fair value for its logs on the

international market is in fact an investment covered by NAFTA Article 1139(h). Not

only is this interpretation consistent with the plain and ordinary meaning of NAFTA

Article 1139(h), but it is also supported by the objects and purposes of the NAFTA.

458. This is why NAFTA jurisprudence supports the notion that Merrill & Ring’s interest in

realizing fair value for its logs on the international market does constitute an investment

under NAFTA Article 1139(h). As the Tribunal in Pope & Talbot the only other

Chapter 11 Tribunal presiding over a dispute involving the regulatory regime of the BC

lumber industry clearly stated:

...the Investment’s access to the US market is a property interest subject to protection under Article

1110.505

459. Should the Tribunal decide this threshold question in Merrill & Ring’s favor, the

conclusion that Canada has violated its obligations under NAFTA Article 1110 follows

quite naturally.

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4. Canada Has Completely Expropriated Merrill & Ring’s Investment

460. The reason for this is that, once it has been identified that one of Merrill & Ring’s

investments does in fact include its interest to realize fair value for its logs on the

international market, then there can be no doubt that Canada has expropriated that

investment. Once the investment at issue in NAFTA Article 1110 has been so defined,

then the question about the extent of interference with that investment fades away.

Canada has not merely interfered with this investment in some partial or ephemeral way;

Canada has completely taken this investment away from Merrill & Ring. This is not just

a partial taking it is a complete taking.

461. Since the investment in question is intangible, there can be no issue here about whether

Canada has taken physical possession of Merrill & Ring’s property, or otherwise stormed

its offices. These aspects of a traditional claim of expropriation of physical property

simply do not fit with an expropriation of the type of investment at issue here.

462. Strictly speaking, the only investment at issue in NAFTA Article 1110 is Merrill &

Ring’s NAFTA Article 1139(h) interest in realizing fair value for its logs on the

international market. It is important to note that this interest is not simply reflected in the

price Merrill & Ring ultimately receives for its logs; rather it is also reflected in the costs

Merrill & Ring incurs to produce its logs. This is because the value of Merrill & Ring’s

logs is affected by both the cost and return sides of the equation.

463. As we have seen, the Log Export Control Regime forces Merrill & Ring to incur extra

costs at every step of the production process. By consequence, in addition to the

suppressed prices Merrill & Ring receives for selling its logs on the domestic market, the

extra costs Merrill & Ring incurs as a result of the Log Export Control Regime must also

be factored into its interest in receiving fair value for its logs on the international markets.

As a result, it is not only those logs that Merrill & Ring was forced to sell on the domestic

market that need to be included as part of its interest covered by NAFTA Article 1110; it

is all the logs that Merrill & Ring produces, regardless of whether they are ultimately sold

on the export market or not.

464. In summary, Merrill & Ring’s interest in selling its logs for fair value on the international

markets that should be the only investment the Tribunal considers in the course of its

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deliberations on NAFTA Article 1110. This interest includes both the reduced revenues

realized the logs, as well as the increased costs of producing them.

5. Canada Has Not Paid Merrill & Ring Any Compensation

465. Not only has Canada completely not just partially interfered with Merrill & Ring’s

interest in realizing fair value for its logs on the international markets, but Canada has

also completely neglected to pay Merrill & Ring any compensation and it has taken

measures in a manner that is inconsistent with NAFTA Article 1105 and due process.

Consequently, Canada has not met its obligations enumerated under NAFTA Article

1110(1).

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See Canada’s Counter Memorial at para. 803. 506

The Investor continues to rely on its damages law set out in the Investor’s Memorial, February 13, 2008 at paras.507

390 431.

VII. DAMAGES

1. Overview

466. Canada and the Investor seem to be in general agreement on the fundamentals of the law

of damages that apply in this claim. The differences appear to occur with respect to the506

quantification of damages.

467. Canada completely not just partially interfered with Merrill & Ring’s interest in

realizing fair value for its logs on the international markets. Canada is required under

NAFTA Article 1110 to compensate the Investor but it has failed to do so. Additionally,

Canada has taken measures in a manner that is inconsistent with NAFTA Article 1105

and due process. Consequently, Canada has not met its obligations enumerated under

NAFTA Article 1110.

468. Douglas Ruffle is a Registered Professional Forester in British Columbia who reviewed

Merrill & Ring’s Harvest Plan. He has produced a revised harvest plan upon which the

Low Report has relied in its calculation of the damages in this claim. 507

469. As a result of the filing of the Low Report, it would appear likely that the disputing

parties can find more consensus on the quantum of the loss that Merrill & Ring has, and

will continue to incur as a result of Canada’s inconsistency with its NAFTA obligations

under the Log Export Control Regime due to the use of independent, non-speculative data

by low.

2. Merrill & Ring Harvest Volumes

470. R-1(b)(i)

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508

509

510

. 508

471.

472.

473.

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Page -177-


511

512

513

514

515

516

474.

514

475.

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Page -178-


517

518

519

517

c)

d)

519

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Page -179-


520

521

476.

.

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

PUBLIC

Page -180-


522

523

524

477.

3. Damages Suffered by Merrill & Ring

478. The Low Report calculates total damages. These flow from three categories of losses:

a)

b) d

c) .524

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

PUBLIC

Page -181-


52

526

527

479.

480.

481.

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Page -182-


a. Losses by Category

482.

R-1(b)(i)

R-1(b)(i)

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Page -183-


528

483.

b. Losses By NAFTA Provision

484.

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Page -184-


529

.530

Based on these four categories, Deloitte calculates Merrill & Ring's losses due to the

breach of NAFTA Article 1102 as $16,804,068. 529

485.


NAFTA Article 1105 as $16,804,068. 530

486.

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

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Page -185-


531

532

". Based on this Deloitte calculates Merrill & Ring's losses due to the breach of

NAFTA Article 1106 as $16,756,272. 531

487.


NAFTA Article 1110 as $18,682,368, inclusive of interest to May 31, 2009. 532

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

R-1(b)(i)

PUBLIC

PUBLIC